Yearly Finance Evaluation: 2012

One of the biggest worries of being in the real working world is dealing with bills. As soon as you graduate, you are pretty much inundated with bills. Testing fees, licensing fees, insurance fees, living costs, and most of all... loans. Without a job, trying to juggle paying for all these can be extremely stressful. Even with a job, the amount of money that grad students owe today can be daunting.

Last August, after I became a licensed professional and was actually bringing home some cash, I took a good hard look at my finances and tried to decide which direction I would be going, especially with paying off my loans. Obviously paying them off faster would help me avoid having to pay more in interest over time. I'm a hater of interest (I mean who likes interest? lol) and not paying things off in full every month so owing this much money bothers the crap out of me. I'm by no means a financial expert but I had to figure something out that would work for me. Here are some things I took into account when I evaluated my financial situation last year.

1. Family Financial Stability - By family stability I mean if I suddenly lost my job, would my parents be able to support themselves financially? In my case the answer to that question was a definite no. My mom is the only one working and she barely brings home enough to pay the mortgage and put food on the table. I have taken over paying for all other bills (trash, utilities, cell phone, etc). If I lost my job, we'd be struggling to keep afloat financially. In this case, I feel the best bet is to save up a good chunk of money in an emergency fund. An emergency fund is really dependent on your own spending habits so one person's emergency fund might only be $5,000 whereas another person's emergency fund might be $30,000. You want your emergency fund to be able to cover your expenses for at least 3-6 months. Of course, you don't have to save all of it up front. It's always nice to keep contributing a small amount of your paycheck to this fund so when that rainy day does come, you'll have yourself a nice umbrella. For me,  it was easier to just save it up front so I could concentrate fully on paying off my loans. Some friends of mine posted an article about this Harvard graduate that paid off all or most of his student loans in the first year he was out out of school by putting all of his income towards paying off his loans. For me, it just wouldn't be the smartest plan. If it was just my life, I would go ahead and do the exact same thing. But with my parents also thrown into the mix, the safest option is to save.  


2. Interest Rates - The first thing I considered when deciding which loan to tackle first was the interest rates. Even though the interest rates for my loans don't vary that much, I decided to tackle the ones with the larger interest rates first. For me, I wanted to start small so I went for the smallest loan amount with the largest interest rate (that would be Direct Loan - E in my chart below). My goal for this year is to finish paying off that entire loan. Just a couple more paychecks to go!


3. Know Your Limits and Be Realistic - Basically don't bite off more than you can chew and don't over or underestimate. After saving some emergency cash, I split my income into thirds. One third goes towards living expenses and credit cards, the second third goes to paying off loans and the last third goes towards savings. It's a good thing to audit yourself each month. How much of my paycheck went to credit cards and other bills? How much did I pay on my loans? How much actually went into my savings? When you do this every month, you can see whether those goals you set out are realistic. Maybe one-third towards living expenses just isn't enough and that's ok. Just adjust your budget accordingly. Maybe it was just the holidays that made you go over your living expenses budget for the month; in that case, spend a little less the following month and save a little extra to make up for the outlier event. It's a system of checks and balances that takes a lot of work to get started but once you set up a nice little spreadsheet, you just need to input the numbers and you're good to go!

Here's how the loan situation is looking a year later. I didn't knock out as much as I had wanted but considering I didn't start paying my loans until January of this year (since I spent a good chunk of last year saving up), I think I'm doing ok. Hopefully I can continue and keep paying that principal down!