The first thing you should do when getting serious about financial freedom is to pay off your credit card debt and other high interest debt. The second is to start contributing to your company’s 401K program and/or a personal IRA. You can read more about that in a post I wrote here. These first two steps are critical in helping you find a successful path out of the daily grind. Make sure you do them first. Once you get this far, focusing on clearing that second tier of debt will be the next thing you take out. Go after car loans and student loans.
Pay Off Your Car Loans
For now you need to focus on taking care of your car, paying it off and keeping it. Stop leasing. If you have a lease, work on getting rid of it. Don’t trade it in and get a new one. Pay it off and keep it.
If you have made the mistake of buying a car that’s just too expensive, it would better to just sell it and buy a used car for cash. If you can’t pay cash, buy something you can pay off fast. It would also be wise to focus on reliability and efficiency. Get something small that doesn’t guzzle gas and that insurance companies won’t charge you a mint to drive.
Seriously, this whole new car thing isn’t helping your bottom line. A car instantly depreciates. You can buy used cars that depreciate slower, but they will lose value as well. It’s just not a wise purchase. Aside from the depreciation of the value in a car, the cost of operating it has to be included. You will have fuel, oil changes, scheduled maintenance, unscheduled maintenance, tires, car washes, insurance, ad valorem taxes, and other fees. If you really sat down and put all this on paper, you’d see just how much you are spending. It isn’t just the sticker price.
Speaking of sticker price, if you’re like most people you financed the car. So you aren’t paying the sticker price. You aren’t even paying the great price you negotiated in that deal you made to get a few thousand off the MSRP. They will get it back with the interest. And they will try to make money off you for as long as they can. I remember when it was almost impossible to get a car loan that was longer than three years. The next thing I knew, you could finance for five. Now, you can get seven year loans!
Not a good idea! If you finance over that long a period, you will pay so much than you literally bargained for. I know you wanted the low payment. But if you want a low payment, get a used car with that payment. Better yet, save up and pay cash outright. You will like be able to negotiate a better purchase price and you won’t pay any interest. All you will have to deal with over the long haul is the depreciate and upkeep of the vehicle. Now that’s a better deal.
As a side note, it would be even better if you didn’t need a car. Many live in cities with mass transit. That’s great. Use it. Others of you could move closer to your work and where you need to get groceries. If you did that, you could bike or walk to these places, cutting you need for a car way down or maybe even at all.
Bottom line, get rid of your car loans.
Pay Off Your Student Loans
For those of you with student loans, I sincerely hope they worked out for you and you have a well-paying and fulfilling career. If so, then you really have no excuse. Get your savings rate up, and start building a solid financial future.
Regardless of how it worked out, you need to retire that debt. One of the best things you can do is make sure you interest rate is as low as possible. SoFi is a reputable organization that specializes in doing that. I recommend them as do many others who write blogs like this. You can click this link and go to their site and start the process. It’s pretty quick, and if they accept your application you’ll be the one to benefit. By the way, if you use my links I will get a small financial reward at no extra cost to you. That would be appreciated but I don’t expect it. I really just want to help. You can just Google SoFi and find them that way.
Student loans are so tantalizing. They seem like a great investment. They promise you a well-paying career if you just get a degree. Graduate and people will begging you to come work for them at ridiculously high pay and benefits. Unfortunately, it doesn’t always work out that way. I know people who’s student loans are over $200,000, but the degree they have isn’t likely to get them a job to be able to pay it off until their fifties!
Aside from the length of time it will take to pay student loans off, it can be the size of a mortgage. A mortgage! I have friends that took out all they could get. They financed expensive apartments, made a few car payments and made sure they could keep partying. Of course, they also paid for tuition, books and food. I watched wondering how it could possibly work out to their benefit, but they were confident. It came back to bite them. Now they have decades of payments. College was a good time, and they lived it up! But it was classic play now and pay later.
I worked through college and helped pay for classes as I went. Also, I chose a school that was more affordable. Sure, there are arguments about the benefits of going to well-known schools and making connections there. That works out for some. Some. But if you have to go into that kind of debt to get a degree from that school, weigh the costs and play it out. How long will it take you to pay that off? Will that discount in whatever advantage you get from the name of your school actually end up working in your favor?
For those of you who are still in the middle of college, I encourage you to stop and think it through. Yes, get your degree. Take great care in how you are mortgaging your future to get it though. If you’re not quite there or just getting started in the whole college thing, be careful how you finance it. Pay everything you can as you go. Use your student loans for tuition, books, reasonable housing, and ramen noodles. Better yet, go to school closer if possible and live at home. If you graduate with little or no student loans, you will already be ahead of the game. Even better if you do it with a car that paid for! Just don’t buy a new one when you graduate.
If you have student loans and you’re along to this step in the process, you need to retire them so you can invest more. Focus on them. Refinance your student loans to get a better rate. Once you do, knock them out as fast as you can.
You will likely need to keep your lifestyle modest as you work through these steps, but it’s just part of the process. Also, you should be able to apply all that money you were using to pay of credit cards. You can do it, and you need to do it as fast as you can.
Don’t Buy On Credit Anymore
Listen, I know it’s not fun putting all your earnings into things that you already purchased. Let the process teach the lesson that you need to learn. Stop buying on credit. Work toward paying everything off before any interest accrues. Once you start doing things this way, you will have a power that few possess when it comes to blazing a trail toward retiring sooner.
That power will pay off in a huge way. If you can get this far, you will be well on your way to gaining momentum toward financial freedom. In fact if you cleared all this debt and started socking the savings away in 401ks and IRAs, you will have built a nice mound of cash. It will take most people several years to get this far, though the more extremely committed of you will do it in just a few. You will be in a place not many find. Most people in the U.S. have considerable debt beyond their mortgage until they leave this world.
You aren’t most people. And once you arrive at this point, you can start investing much more aggressively. You also will have built financial muscle that helps you keep things in perspective as far as your lifestyle. Because you had to cut back and make tough choices to get here, you will know what really matters to you. You won’t be tricked by the marketing machine or be lured by the shiny and new. Rather than paying off one debt only to replace it with another, you turned a liability into an asset that now works for you. Interest starts compounding for you instead of against you. Along with that, your savings rate starts increasing to sky-high levels.
You are now in control. You get to decide where to go from here. Once you build your nest egg to the right place, you could even chose to retire sooner.