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I am currently considering a few expensive purchases.  I am looking at a new flat screen HDTV to replace my old analog TV.  I am considering Lasik eye surgery.  I am considering a new road bike.  I like nice things and experiences, and I am happy to spend the money if it is something I will really enjoy.

However, I can’t just go out and spend $500 on a TV without thinking twice.  I cannot justify spending nearly $2000 on my eyes when I still have about $13,700 in student loans.  I surely will not spend $800 on a bike when I have one that works just fine and I have other priorities.

The keys to making expensive purchases are to be able to afford what you buy and be sure it is what you really want.

Be able to afford what you buy

This is pretty self explanitory and obvious to many of us, but a lot of people go out and buy new things on credit that they really can’t afford.  A $500 TV can cost thousands if you buy it on a credit card and only make minimum payments.  I don’t even want to think about the cost of Lasik on a credit card over 10%.

If you have a big purchase in mind, save up ahead of time.  I will still buy everything on my card to get my 2% cash back, but I will pay it off in full the same month.  To save, you may want to put a certain amount in a savings account every month or just let your checking account grow if you have the will power to avoid spending.  You can set up a goal with Mint.com

Make sure it is what you really want

Buyers remorse is a bad feeling.  When you buy something that you didn’t really need or want, you will probably regret it later.  If I buy something that costs more than $100, I always sit on it for a day or two to make sure I really want it.  For bigger purchases, like the TV, I wait a month or more.  If you still want it after a waiting period, go for it!

Prioritize

If you are in debt, don’t be stupid.  Pay your loans off before you go buy a luxury item.  If you want a bunch of expensive things, it is a good idea to decide which is most important and slowly work your way down the list.

How do you prepare for a big purchase?  What are your steps and criteria?  Please give your thoughts in the comments.

In Fight Club, Tyler Durden famously said that “the things you own end up owning you.”  I have written about how hard you have to work for your possessions once before, but I decided to take it a step further and find out how much time I have to work every month to pay bills.

It turns out that I spend nearly 75% of my time at work for recurring bills, including rent, student loans, and utilities.  That means only about ten hours every week are for the things I like to do, such as eating and entertainment.

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You can also build a calendar like this.  I have put together a free spreadsheet on Google Docs to help you figure out how much of your paycheck goes to fixed bills.  From that spreadsheet, I created a second Google Calendar that I used to input the work days per month.  It turns out that my biggest fixed expenses are taxes, rent, and student loan payments.

This was an eye opening exercise.  Take a run through and let me know how it goes in the comments.

Over the last eighteen months, you have read about my education many times.  I have discussed student debt.  I have discussed working while going to school at the same time.  Well, my tone is about to change a bit.  About 2o minutes ago, I finished my MBA program!

Long before I had this blog, I had a car loan.  My old car, a hand-me-down 1990 Volvo Station-wagon with about 200,000 miles, decided to stop working while driving west on Belleview Avenue one summer morning.  Fixing it would have cost as much as the car was worth, so I decided to get a brand new one.

After all, I had a good job and was living at home with my parents.  It seemed like a good idea.  Now, two and a half years later, it still seems like it was a good idea.  I still love the car and I was able to pay off the loan two and a half years early.  That is half of the scheduled time for those of you who are math impaired.

Over the lift of the loan, I paid a total of $675.53 in interest to the credit union for my $10,995 loan.  That is not too bad.  I like to think of that $675 as my car rental fee for the roughly 30 months I have been using the car so far.  That is a savings of $573 from the total interest if I had only made minimum payments.

I took a screen shot to commemorate my last online payment.  Silly me, I didn’t check the “payoff amount” and was left with four cents that I could not pay online.  A quick phone call took care of that though.

I plan to keep this car for many, many years and I am glad I have it.

What am I going to do with all of the money I had been putting into the loan?  I am sticking to my own advice.  My debt snowball leads me to student loans from here.  I have just about $21,900 left there.  I am still in school, so most of the loans are not accruing interest for another 7 months.  I have paid about $20,000 into my student loans while I have been in school, so paying down the rest shouldn’t take more than another two or three years.

Do you have any good loan payoff stories?  Please share in the comments.

For the first time, I am going to give exact details on my loan balances and how I am paying them off.  I will also discuss the popular “snowball effect” for paying off your own debt.

I have three loans with balances.  My car loan has a balance of $4,175.51 at 5.95%.  My unsubsidized student loan has a current balance of $2,698.57 at 6.8%.  The subsidized portion has a balance of $8,500 with no interest until after I graduate.  I have been paying far above what I need to for each of those loans to have them paid off quickly.

I pay my loans automatically.  According to the snowball theory, which I will describe in more detail shortly, I should be paying as much as possible into the 6.8% loan and a minimum payment in the others.  I am not.  I built my own plan.  I make payments into the two interest bearing loans automatically twice every month.  I don’t even have to think about it anymore, my bank does it for me.

I pay $150 every two weeks into the student loan, which is still growing quarterly.  That $300 per month is well above the interest only recommended payment of just under $20 per month.  I am not required to make any payment until six months after graduation, but I would rather pay as I go and graduate with less debt.

I automatically pay $170 per month into the car loan for a total of $340 per month.  I picked this number because, at that rate, I will have the five year loan paid off in three.  The initial loan was for $10,995 in August 2007.  I was paying double the $210 monthly payment until I started school.  I lowered my payment to ensure I had enough cash to make significant progress on the student loan while in school.

At the rate of payment above, I will have my car paid off when I graduate and will have the entire non-subsidized portion of my student loan paid off when the subsidized portion kicks in.  That will leave me with one loan requiring about $200 per month minimum payments.  I hope to pay it off twice as fast and be done with it 5 years after I graduate.

So, how does the snowball effect work and why am I not exactly using it?  I am so glad you asked!  Here goes:

Lets say you have 3 loans.  One has a balance of $5000 at 4.9% (minimum payment is $150), the second has a balance of $1000 at 5.9% (minimum payment $50), and the third has a balance of $3000 at 7% (minimum payment $100).  Which do you pay first.  (Please take this time to formulate an answer before reading on.)

If you said the third loan, you are right.  The smartest strategy is to pay for the highest interest rate loan first.  It doesn’t matter what the minimum payment is.  It doesn’t matter what the balance is.  All that matter is how much interest you pay per dollar.  There are psychological reasons to pay the 5.9% loan down faster, as it will be paid off quicker.  However, in reality, we should pay for the highest interest rate first.

Why am I not doing that?  The psychological reason.  My student loan is growing and will keep growing until I graduate.  My car loan is fixed and shrinking.  I want it to be over.  That is why I pay more into a lower rate loan.

The snowball effect is, surprisingly, not related to that famous scene in Clerks. (Rated R)

Snowballing, for loans, means you pay the minimum payment on all of your loans except for the highest interest. You pay as much as possible into that loan. Once it is paid off, rather than just lowering how much you put into loan payments, you put all of that into the next highest interest rate.  In the example above, you make the $50 and $150 minimum payments while putting $200 into the highest interest loan.  Once it is paid off, you just start putting that $200, in addition to the $50 minimum payment you were already making, into the 5.9% loan.  Once it is paid, you put the whole $400 into the 4.9% loan.  That is the fastest way to pay down all of your debt.

I am happy to give you one on one help if you are trying to set up a plan like this.  If you send me your details through the contact form, I will put your plan together, in a spreadsheet, for free.  I just ask that you let me share it, anonymously if needed, on this blog as a feature about how one real live person is going to do it.  Most financial advisers would charge $100 or more an hour for this.  Remember, I have a finance degree and I am working on an MBA, so I do really know what I am doing.

If you were confused by any of this, please let me know in the newly fixed comments.  I can answer any questions, about my situation or snowballing, in the comments.  And no, I don’t like what they talk about in the video.

Photo Credit [1]

Most people in their twenties and thirties are familiar with Will Smith’s old song Parents Just Don’t Understand. I had an epiphany. My parents were once my age. They have gone through the same things as me. They do understand.

I am currently a full time student, a full time worker, and I am dealing with the parts of life twenty somethings deal with. I have a rental lease, but I am thinking about buying. I am paying off a loan. I am in a relationship. I am dealing with taxes. I am navigating my way through life.

My parents were once in their twenties. Weird huh? They have had many jobs. They have paid several loans. They have dealt with leases and contracts. They have been in relationships. They have had about 30 years of life on top of what I have.

I do argue with them. After all, I am always right. (wink, wink). But I try to remember that they have done it before and will never do anything to hurt me. They only want me to succeed.
Remember that other twenty somethings (and teens). Your parent’s just want what is best for you.

Food
1. Make your own coffee
2. Take your lunch
3. Buy generic brands
4. Skip the candy
5. Use coupons
6. Buy in bulk
7. Bake from scratch
8. Cook for yourself
9. Take back your bags or bring your own (many stores give a discount)
10. Look at the per ounce/pound price. Bigger does not always mean cheaper.

Car
1. Keep your tires inflated (saves gas)
2. Go to GasBuddy.com to find cheaper gas
3. Do not change your oil every 2,000 miles (check your manual. Mine says 5,000)
4. Get cheaper insurance if you qualify
5. Keep to your maintenance schedule to avoid big costs later
6. Don’t carry extra weight in the trunk
7. Accelerate slower out of lights and stop signs
8. Do not drive over 55 miles per hour
9. Take public transportation if it is cheaper than gas/parking
10. Find cheaper parking lots when in urban areas

House
1. Lower your thermostat
2. Lower your hot water temperature
3. Switch to compact florescent light bulbs
4. Wait until the dishwasher is full to run it
5. Water your lawn less
6. Take shorter showers
7. Let your grass grow a little more before cutting it (unless you use a hand power mower)
8. Get winter window insulation kits (I use Frost King. It really works!)
9. Skip dryer softener sheets. They don’t really do anything anyway.
10. Turn off the lights when you leave the room

Bills
1. Downgrade to a lower cable/satellite plan if you don’t use all of the channels
2. Pay your credit cards in full every month to avoid interest charges
3. Stop newspaper or magazine subscriptions unless you really read them. Online is free!
4. Re-evaluate that cell phone plan. Do you really use those minutes/texts? (Beware of ETF)
5. Prepay your car/mortgage loan to save interest in the long run. Every bit counts.
6. Refinance the mortgage if you have a high rate
7. Pay on time. Late fees suck!
8. Pay online. Some companies give a paperless discount.
9. Save the stamp. Another saving for paying online.
10. Consolidate your student loans to a lower interest equity loan

Spending
1. Don’t buy that impulse DVD at Target/WalMart (I know that one is hard)
2. Do not buy the whole CD if you only like one song. Buy the MP3 online for $1
3. Distinguish between wants and needs
4. Distinguish between wants and needs (I really need to emphasize that one)
5. Do not buy drinks at restaurants. Water is free (and healthier).
6. Avoid the bars. Drinks at home with friends is much cheaper.
7. Find a hobby that costs less than your current hobby
8. Get books from the library rather than the book store
9. Get movies at the library rather than Blockbuster or Hollywood Video
10. Enjoy going outside. There is no admission fee for most parks and trails.

As you can see from my Net Worth widget, I just had a big dive. I started tracking my net worth just before my first tuition payment. My first quarter cost about $13,000. I paid about half cash and took out a student loan for the other half.

Why would I take out loans when I have enough cash on hand to pay them off? I have enough saved to do roughly the same each of my six quarters of school. At the end I will have about nothing.

I have two loans right now. One is a car loan, the other is my student loan. I will get into the ups and downs of car loans in a later post.

In the future, I expect my net worth to go down and down six times throughout school. At the end, I plan to watch it go up and up. While in school, I am working and saving for retirement. With fund prices so low, it is a good time to buy.