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Welcome to the newest installment of “Getting Out Of Debt,” a new series where I realize just how horrible my financial situation is and figure out how in the world I’m going to rectify it. If you missed the last column, read Getting Out Of Debt: Salary Negotiations.
In the last couple of weeks on this debt journey, things have really started to look up for me. I got a new, full-time job, created a budget, and negotiated my starting salary. Basically, I’m crushing it. I haven’t gotten my first paycheck yet so I haven’t actually been able to implement many of my money-saving plans yet either, but at least I haven’t acquired any new debt and my regular minimum payments were all on time, so we’re going to call that a win. I figured it was time to calculate my net worth changes from when I began this journey about a month and a half ago, and I figured seeing that bump in my net worth would encourage me to keep going. Until, that is, I logged onto Nelnet to check my student loan balance and noticed that it had gone up by just about a grand. Wait, seriously?
If you want to have a heart attack, this little nugget of information is a great way to start: interest from your student loan compounds daily. That’s right. Every single day you’re not paying off your student loans, they’re getting bigger. Even if they’re in deferment like mine are. Surprise! Getting out of debt is going to be a lot harder than I thought. I looked at my change in debt since the last time I calculated it, and unfortunately for me, it looks like compound interest is truly a bitch.
Student Debt: $99,973.32
Additional Debt: $23,227
Savings: ($0)
Total Debt: $123,200.32
Change from beginning: (-$656.16)
That’s right. I spent a total of $712.11 in monthly payments only to accumulate debt this month. Thanks a lot, compound interest.
According to people smarter than me on the Internet, compound interest doesn’t always have to be as evil as my boyfriend’s mother, but it actually has a benefit – at least when it comes to savings. As you invest your money in your employer-issued 401(k), the interest compounds over time, which means you most likely won’t have to spend your 80s as a WalMart greeter, or whatever the 2080 equivalent of that job is going to look like.
Even though this was a huge slap in the face after jumping huge hurdles like cutting up my credit cards, there’s still hope. In a few weeks, my salary increase hits my bank account and I can finally start making progress in paying off debt. I’ll be making compound interest work to my advantage by investing in my company 401(k) to hit my company match, and I’ll actually start paying down some of that excess debt so that by the time my student loans hit my account in December, I don’t have to explain to my new employer why I’m spending my evenings Costanza-ing under my desk on a KinderMat.
My key takeaways from this little lesson in compound interest are that I should start investing in my company’s 401(k) plan, like, immediately, and that if I wasn’t already, I should really start tackling this debt with a sense of urgency. If you’re in deferment, it’s easy to ignore your loans, but take it from someone who actually sat down and calculated her debt – that’s going to be much more trouble than it’s worth. Your current self may wish you were spending more money on brunch to catch up to the media’s perception of the average millennial, but when your future self doesn’t have to pay back avocado toast with 15.99% interest on a credit card over the next three years, you’re going to thank me. .
Image via Shutterstock
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Steph W.
Steph W. is a new Master's degree graduate with an intern's salary and six-figure taste. She realizes her expectations far exceed reality, so she spends her days pinning away Loubs she pretends are in her physical closet instead of her virtual one. Her hobbies include attempting to trapping her boyfriend into marriage before he finds out how insane she is and pretending that Black Box wine tastes as good as the kind she could afford when she was gainfully employed. Send her tips for getting out of student debt at recruitchairtsm@gmail.com
@therecruitchair
I’m sorry, Steph, but I cringed so hard when reading this because of the mass amount of misinformation and because I’m so sorry that you had to find out about compound interest this way. With that said:
1. Compound interest on your 401k doesn’t work the way you think it does. Your 401k only benefits from compound interest if you invest it in fixed income securities. If you invest in stocks or ETFs, compounding doesn’t apply. The market could crash tomorrow and your 401k would be worthless, compound interest be damned.
2. Please avoid putting sizeable money into your 401k until you’ve paid off your debt. Now that you know how bad compound interest is, you understand that you need to make very large payments each month in order to make some sort of dent in your debt. That means your payments have to be much higher than minimum because otherwise you’re paying all interest and no principal, which leads to a never ending cycle.
3. They really need to teach basic finance in high school, or at least college.
I agree with point #3 especially. For anyone that struggles with managing their finances, please get on amazon and order “the millionaire next door” and/or “rich dad poor dad.” I am very thankful they were recommended to me when they were.
I wrote my master’s thesis on the need for basic personal finance instruction in high schools. It’s kind of scary how low the level of financial comprehension is in America.
as a former high school teacher, i don’t really think it would matter much if it was taught in school, unless it was started at a younger age (maybe like middle school?) and by the time they are older it’s like, pounded into their brains. you can tell someone a million times to not charge more on a credit card than you can pay off, but look at how many people are still in credit card debt. it’s sad.
Finance 101(Personal finance) should be a required course. It skims topics like budgets, mortgages, credit cards, investments, insurance, etc. Basically, the teacher explains basic “need-to-knows” prior to getting out of school. Much more effective required course that the English lit.
We should be teaching kids how to mine digital crypto currencies like Bitcoin using high powered CPU’s and then teaching them how to code. The best way to maximize your currency in your digital wallet is to optimize your energy consumption in regards to the high powered electronics that are needed to make real return at scale. Solar power is an option but it’s expensive upfront. What has to happen is for Zero Point energy to be released to the public from black budget projects that are off the government ledger which would provide free and limitless energy to everyone with huge power potential when a noble gas like Helium is passed through it.This would literally destroy the need for money and greed all together and would result in true ultimate freedom for the human race
You know no one reads this shit. You know that, right?
The principle of compound interest applies for non-fixed investments… dividends that are paid can be reinvested and act as compound interest. Also, the max match should definitely be contributed to her 401k. Cut out the avocado toast, not the free money for retirement.
I generally agree with you Bill. But if her employer is matching her 401k contributions, she should contribute as much as necessary to get their maximum match, credit card debt be damned.
I think this was a hot topic of conversation on my previous comment on her Steph’s article and I stand by my original point. Her monthly debt payments are insane. At this rate, if she keeps contributing to her 401k, 10 years down the line she’ll have a decent nest egg, but will still be nowhere near paying off her loans. I’m no certified financial planner, but I think that being in your middle ages with no debt and a small/no 401k is better than having a decent 401k but being in a ton of personal debt.
As a CFP; no we 100% would say to take the match. Let’s say she has a 50% match on the first 4% salary. $100(easy numbers) a week nets $50 match or 50% return overnight.
I always tell this to clients when they give me the “How will you be able to double my money?” shot.
Bill, what if her company is matching 6-10% on the 401k? Thats a lot of “free money” in company match for her to miss out on. It will take her A LONG TIME to pay off this debt regardless if she contributes to the 401 or not. She might as well have something to show for it in savings when all is said and done.
Plus, someone with poor financial habits will not likely use the excess money saved from not contributing to the 401k, to pay down additional debt. Her contributing to the 401k will be a “forced savings” of sorts.
I think it’s going to be difficult to agree on a decision on this without knowing the exact details of Steph’s situation and we can come up with all kinds of possible scenarios.
On a personal level, I wouldn’t be comfortable putting anything into an account that I can’t touch for 40 years if I were $100K+ in debt. Plus, I think it’s time that she changes her spending habits, otherwise she’ll never be debt-free.
Bill I understand your point but it’s actually a math problem. If her interest rate was higher then both the value of the match and the expected growth in her 401k then she shouldn’t take it and use the money to pay off debt but that would have to be an insanely high rate 57%+. She should however not contribute any more than the match unless she is confident (which she can’t be) that the return would be higher then the Interest on the debt.
Agreed completely that it’s a math problem. Mathematically, it makes sense to contribute at least up to the match maximum.
But like I said, there’s also the personal factor and some people are less comfortable carrying that much debt than others.
Even if she has never missed a payment, I can’t imagine her credit is anywhere above 600 with that much debt. That alone seems like a good enough reason to pay it off first.
This. This. This. Be debt free before you start saving, otherwise all that money you saved is just going to go towards paying off the debt in the future only it will be more due to the interest.
I think it’s more complicated than that. Being debt free is, of course, a huge step towards financial security, but if you delay investing for retirement for too long you find yourself in the position of having to put in WAY more money because it doesn’t have time to grow.
I will say delaying saving in favor of paying down debt makes sense if you’ve got cash flow problems or if the interest rate is high. Definitely a lot of factors to consider.
TL;DR: I read something on The Motley Fool
I don’t understand why PGP hasn’t blocked your account yet.
Conspiracy theory: he is a pseudo account for someone that works are Grandex who is here to troll and have fun with the people in the comment section yet has the ability to manipulate the success rate/failure rate of his comments given the fact that he has had is comments go from -20 to +18 at an unrealistic timescale on older articles especially in response to my comments in particular as my comments have gone in the reverse fashion (positive to negative)….all to create feuds and division in the comment section in order to conquer and also drive traffic to the site and it’s articles lol idk
So what you’re saying is that thevaginator is actually deFries’ alter ego.
It very well could be or it’s Dillon’s internal frustrations being let out anonymously so he can blow off some steam without harming is VP reputation. Plus Native American chief wooden statues are very stoic on the outside but deep down you know their souls are running around like Kevin Costner in Dances With Wolves
This was your only comment trail I have agreed with, and I’ll give credit where credit is due.
Nah he’s just some loser that used to troll TFM and now he’s over here. Don’t feed the troll.
You losers are pathetic. No one at Grandex gives a shit about the comments or the commenters or the opinions of the commenters
You called people pathetic and in the same sentence, said nobody gives a shit about your opinion. Nice.
May not be the best thing to hear- but when you’re that far in debt with high interest rates, it may be a good idea to get a side hustle. Whether it’s bartending, babysitting, or seasonal temp jobs at Macy’s: more $$ means more debt payments. Remember, accumulating wealth in life means being uncomfortable at some point.
Additional benefit to having a side hustle: you don’t have enough time to spend the extra money you’re making so it can all go to student loans.
are you a CFA or CFP by chance?
I’m neither- I budget military finance for a living, but I’m about to be making the shift towards data analytics in the next year. How’s the cfa exam?
From my experience (failed first attempt at level 1, studying to retake) the CFA is more of a mental grind than anything else. The material isn’t incredibly difficult, just unbelievably bland and time consuming to study.
Sucks, but worth it when you’re done.
Also, I’m not sure if the amount of time the CFA takes is worth it if you plan on going into data analytics.
Setup biweekly payments on the student loans. Won’t stop the compound interest, but it will help you cut into the principal faster.
“…as evil as my boyfriend’s mother” loved this bit of comic relief.
Good to hear that you are being proactive about your debt. Not sure what you studied but there are also a good amount student loan forgiveness programs for public service professionals.
I would actually recommend you hold off on 401k contributions. Kill the debt. Going full throttle and missing a few years of 401k savings will save you down the line. You’re best tool in accumulating wealth is your income. Kill the debt (and it’s monthly payments) and THEN concentrate on retirement. I work in finance and part of that includes financial counseling. Please, please, please throw the full weight of your income against the debt and THEN work on retirement.
I hate to be that asshole but all money is considered debt since it was technically created out of nothing off of a debt request that needs to be paid back over time. You’re essentially paying off debt with debt + interest to to an entity who is using your debt payment to pay off their debt plus interest and so on and so forth. That’s the genius of the fractional reserve banking financial system. The whole point is so that no one ever gets out of debt. I look forward to having my grandkids read this series after your grandkids get grandfathered into writing this series as well as paying down your debt plus their own debt lol
Plus interest lmao
You’re not very good at this are you Pacho?
There’s a reason why we have a privately held centralized banking system who gets paid back the interest on the money it loans out to governments and other central banks around the world who lend out money to commercial banks who lend out money to people while only keeping 10% of deposits in reserves. Why do you think anyone who has tried to abolish the federal reserve or the IMF and establish a decentralized currency gets murdered?
I enjoy your conspiracy theories, but this one is nonsense. Ever heard of hyper-inflation? That’s why the central bank is controlled by the government. I know it’s more fun to say the bank puts fluoride into the dollars to control the sheeple, but stopping us from becoming Zimbabwe is the real reason.
Agreed. But it’s also easier for the entities that control our money supply have our currency backed by so much demand on a global scale due to dollarising other economies like Zimbabwe’s which devalues their own local currency and also allows dollarised businesses in those countries to charge higher interest rates and transaction/service fees for money movements to then have that money go to foreign entities outside of said country, causing hyperinflation rates. Also having our currency become the petrodollar further strengthened the dollar. This helps prevent hyperinflation back here in the US. Anyone who has ever tried to leave the petro dollar and create a new currency has been brought into war or killed (Saddam Hussein and Gaddafi) because it would ruin the dollar’s value and cause hyperinflation here in the homeland and you can’t have the most powerful country imperialistically implode on itself just yet. There needs to be a suiter to be chosen after and my guess would be China since they have trillions of dollars in foreign currency sitting in their reserves and a massive population that still is able to have a stable currency of their own. Fluoride is damn good in Crest toothpaste though
I’ll hedge on tackling your ideas about the petrodollar and killing saddam and ghadafi as there are multiple reasons why those two thing happened. But, I will say that oil is not the only driver of our currency’s valuation… The reason that China and Russia don’t dumb a couple hundred billion of our t-bills on the open market is that at the end of the day, nuclear war is the fastest way to get debt off a country’s balance sheet. While we are unlikely to nuke China or Russia, the threat is real enough to hinder that sort of action. Also, the unspoken agreement from the world is that they will buy our debt, and we will warhawk all the desert countries.
Dr. Ron Paul has been saying this for years. Suspiciously he never got elected 3 times.
Keep dancing little man. Every time you hit the reply button you’re showing the world how much of a goober you are
I’m such a goober dude it’s unreal
Did I say goober? I meant loser. But I’ll accept your previous answer
First of all Nelnet is the worst. Second- your monthly payments should always cover principle and interest. Sounds like there is a mistake somewhere.
That is absolutely incorrect
You must be one of the lucky few who isn’t on an “income based repayment” plan to believe this
Corporate and government debt have their uses but personal debt is for poors. Lap me all you want but you know I’m right
Shhhh grown ups are talking.
Couldn’t agree more. I’m in your corner.