Leading off
It’s no secret the system is flawed. Children are taught an outdated curriculum in school and are forced into a pitfall of financial worries from the moment they agree to student loans and the terms in which he or she will pay the loans back. Before knowing what it’s like to live on their own, kids are forced to choose a major of study which rarely turns into a career path. They are not taught personal finance like how to open a bank account, nor are students taught how to do their taxes, apply for a mortgage, compare interest rates, invest into the stock market or change a diaper.
Basic life lessons are left untaught in grade school, leading students towards taking massive amounts of student loans to one day receive the most expensive piece of paper of their life that may or may not result into a well-paid job or even a paid job at all.
Problems with debt
Education is a good thing. I am not advocating for students to forgo college, however I am uncertain that students realize the enormous debt amounts and high-interest rates they are inheriting from committing to a university. Not everyone can qualify for a scholarship so I understand when student loans are necessary. I had a generous amount of student loans after graduating college. My loans sat on my shoulders with me the day I collected my diploma. My loans haunted me my first summer as a graduate as I knew the interest was piling on to my principle loan amount every day. Every day that passed, I was hit with a $0.25 fee that was added to my overall principle loan amount. It felt like it was never-ending.
Make a plan
While I craved a new car, an apartment of my own and independence from my parents, I knew my student loans were going to hold me back for years to come if I did not take care of it quickly. Instead of paying of the minimum amounts, I wanted to take care of my loan payments with as much money as I could afford to expedite the process.
I had three outstanding student loans, all different amounts with different interest rates. I made the decision to pay down my largest loan first, which also carried the highest interest rate. I paid $1,000 per month towards the largest loan and $500 per month to each of my smaller loan amounts. In total, I was paying $2,000 per month towards my student loans. Once I started to see progress on reducing my debt amounts, I was encouraged to knock them out quickly.
The more I paid towards my loans, the sooner I was towards freedom of any debt. I was tempted to reduce my monthly payments so I can enjoy a bit more cash on hand to spend, but I bit the bullet and continued to pour my money towards paying off my student loans.
Finally about two and a half years later, I was financially free from all student loans. It too over 30 months of consistent payments, but I was free. In total, I saved over $9,000 and was ready to start building wealth instead of paying off debt.
If you want to learn more about my specific student loan repayment strategy, please sign up for exclusive content with documentation of month-to-month finances, budgeting breakdowns of my journey to debt-free living.
The turning point
My student loans had interest rates ranging from 6-8%. That means I was actually paying more money because I did not have money in the first place. Weird how that works, right?
After climbing out of debt and paying off the principle, I was not only out of debt, but no longer on the negative side of interest rates. That was the turning point for me.
Once I was free of student debt, I had a clear plan in mind. I wanted to take the same money I was using for my student loan payments, and deposit those funds into a brokerage account to start my investment portfolio. I opened an individual brokerage account and began small, buying 4 shares of $SPY, an ETF that tracks the S&P 500. I knew this wouldn’t make me rich, but I knew this was the first step towards successful investing. The important thing was that I was collecting the benefits of interest rates.
I went from paying 6-8% interest rates, to collecting about a 2% yield from owning $SPY shares and started passively building my wealth.
Delaying gratification
Getting out of debt is one thing, but staying out of debt is a constant battle. It is important to stay as disciplined as possible and delay gratification. Let others spend their money on luxury cars or fancy clothing, those items are not assets and will not provide future value. The smarter route is to put that same money towards assets.
Buying shares of corporations is not as fun as riding a jet-ski on the ocean, but eventually the value of an item like a jet-ski will lose its’ value over the course of time while the value of shares of corporations will provide a return on investment for years to come.
As a general rule to go by, a jet ski with more than 100 hours is considered a high hour jet ski. On average a jet ski should have approximately 30 hours a year. Anything more than 30 hours per year is considered “high hours”.
- Source: JetSkiTips
If the jet-ski lifespan is stretched out over the course of 10 years, keep in mind you will need gas and insurance in order to enjoy your jet-ski. New jet-ski or wave runner vehicles cost between $5,000 and $20,000 depending on the make, model and year. Include $50 gas fill ups and about $150-$500 per year for insurance.
During that same time period, the value of stocks might fluctuate but you still own the shares and if it is a dividend paying stock, you actually will start making a profit off that initial investment. I love dividend stocks for this reason and many others.
Instead of paying insurance and gas, you can take that additional $1,000 per year and re-invest that money towards your portfolio. You can build a wealth creation machine instead of riding around on a wealth killing machine. After the 10 year period, you will see your initial investment rise in value, collect dividends for every share you own, and you will also contribute over $10,000 towards your investments instead of paying for gas and insurance!
It’s a no brainer to think twice about spending on toys, but it’s even more important to think about the double-positive by investing your money into good, well-run corporations. Again, it is not fun or sexy in any way. But it is proven to be effective over time with diligent investing and consistent discipline with patience. Over time you will see the value of your assets increase and your future-self will thank you for investing as you receive higher dividend payouts while your buddy spends more money on fixing his jet-ski, without even realizing the upside he missed out on.
Please do not interpret any of this content as direct recommendations or investment advice about how to trade stocks. Feel free to reach out to get put into contact with a Certified Financial Planner to learn more about investing and how to get started.
If you have any questions, comments or would like to submit an article, please send an email to themoneymailbag@gmail.com.
💲📬👜