The Guidepost
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Putting it All Together

Welcome to the last lesson of Financial Health 101: Debt and Student Loans, a free short course from Justworks.

 

Lesson 1 | Lesson 2 | Lesson 3 | Lesson 4 | Lesson 5

Welcome to the last lesson of Financial Health 101: Debt and Student Loans, a free short course from Justworks.

You made it! Hopefully you are feeling more in control of your financial health, or at least that you have the tools to get in control.

We know it’s not easy, especially while you pay off student loans and other debt. But it is achievable - and much easier to manage if you have the right plan in place.

Here’s a recap of what we covered in this short course:

 
 

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Not All Debt Is Created Equal.

Good debt creates value in the long-run. It generally carries a lower interest rate, which means it costs you less to borrow. On the flip side, bad debt doesn’t create value in the long-run and carries a high interest rate, so it’s more expensive.

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Remember: good debt can become bad debt if you don’t pay at least your minimum - or skip too many payments entirely. That will almost always cost you more in the long run.

The Holy Grail: Your Credit Score

It’s a three-digit number that packs a punch. Your credit score tells potential lenders how likely you are to repay debt. When you have a good credit score, you are a more attractive borrower and can get access to lower interest rates on many credit cards and loan products. It also improves your chances of getting approved for things like mortgages, renting an apartment or home, and new lines of credit.

When people in the U.S. talk about credit score, they usually mean FICO score. A FICO score takes into account your credit score across the three big credit reporting companies. If you’re doing everything right to raise your FICO score, your score should go up across the board.

FICO scores for most people are broken down like this:

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To get a better sense of where you stand, you want to be familiar with your credit report. This has all the details that your credit score is based on. You can get your free credit report here www.annualcreditreport.com.

 
 

 
 
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Whatever your financial goals, your credit score will play a big role in how you get there. This is why having the right approach to paying off debt is so important. If you miss payments, increase the balance owed on credit cards, or accumulate too much bad debt, your credit score will take a hit.

That’s where the 3-step comes in. It’s a simple but effective approach to achieving financial health:

  1. Knock off debt, starting with bad debt. It’s more expensive and can hurt your credit score. Later in this lesson, we’ll share some strategies for prioritizing what to pay off and when.

  2. Don’t accumulate any more bad debt. Avoid being in a situation where you are forced to borrow money at a high interest rate. Pay bills on time. Live within your means. Save for emergencies. Personal budgeting will be your friend for this.

  3. Get a start on retirement savings. Yes, even in your ‘20’s. In fact, that’s the best time to start. We have some ideas for where to begin.

The rest of the course was devoted to this. Let’s dive in.

 
 

 
 
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We reviewed two prioritization strategies that can help you create a plan of attack for knocking off debt the smart way:

Debt Avalanche

With this approach (also known as debt stacking), debt is prioritized by interest rate. Here’s how it works:

  1. Pay the minimums on all of your accounts.

  2. Put any remaining money towards the account that has the highest interest rate.

  3. When that account is paid off, focus on the account with the next highest interest rate.

  4. Repeat steps 1-3 until all debts are paid off.

Pro: You’ll save money on interest in the long run.

Con: It could be a while until you completely pay off any one account.

Debt Snowball

With this approach, debt is prioritized by balance. Here’s how it works:

  1. Pay the the minimums on all of your accounts.

  2. Put any remaining money towards the account with the lowest balance.

  3. When that account is paid off, focus on the account with the next lowest balance.

  4. Repeat steps 1-3 until all debts are paid off.

Pro: It feels great completely paying off a debt. The psychological benefit might just be the motivation you need to stay on track with your overall plan for financial health.

Con: You might pay more in interest.

Repayment Plan Options

In addition to prioritizing your debt, it’s also worth investigating any options you might have for improving the terms of your student loan repayment plan. Depending on your student loan type and other factors, such as income, field of work, credit score, and payment history, certain repayment plans can offer lower interest rates, a simpler payment process, or the opportunity to reduce what you owe.

We walked through some options including:

  • Federal loan repayment plans. These included basic, income-driven, and income-sensitive plans, as well as forbearance, discharge and cancellation options.

  • Consolidation. Potentially a good option if you have multiple federal loans and are looking to simplify or lower monthly payments.

  • Refinancing. Potentially a good option if you have one or more private student loans and a good credit score, and are looking to save money by finding a lower interest rate.


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Once you have your plan of attack for knocking off debt, you need to make sure you can cover expenses each month and avoid being in a situation where you are forced to borrow money at a high interest rate. In other words, you need to do some personal budgeting.

The Anatomy of a Budget

To understand what you can afford to spend (and save) each month, and where your money should be going, you need to know the following:

  • Income. How much money you earn each month. For the purposes of budgeting, you want to know your after-tax income: what you take home after taxes are taken out.

  • Fixed Expenses. Expenses that will not change month to month.Things like rent and student loans fall into this category.

  • Variable Expenses. Expenses that change month to month. This includes going out to eat, groceries, clothing, and vacations.


50/30/20

Once you know the core pieces of a budget, you need to put them together in a way that gets you on the path to financial health. The 50/30/20 budget is a great jumping off point, especially if you have debt to pay off and are just getting started with financial planning.

The first step is identifying your after-tax income. Make sure to add any deductions, such as health insurance or retirement contributions, back into this number. Once you have this calculated, the next step is to bucket your expenses into these three categories:

Need: Anything that would severely impact your quality of life if you did not have it. Minimum debt payments that, if missed, could negatively impact your credit score.

Want: Things you enjoy, but could forgo with only minor inconveniences.

Save & Repay: This is the category for paying back any debt beyond minimum payments, and contributing to your future - be it retirement or an unforeseen emergency.

Where To Put Your After-Tax Income

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That’s it. You now have a map of how much you are bringing in each month, and where it’s going. If you have to make cuts to your monthly expenses, start in the “want” category.

Whatever You Do, Don’t Ignore the Emergency Fund
Having a stash of cash easily accessible should you run into any urgent, unplanned situations (lost job, accident not covered by insurance, etc) will help you cover unexpected bills and avoid having to borrow money at a high interest rate (ie bad debt).


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Your 20s are an amazing time to put money toward your future. Time is on your side due to one big reason: compound interest. That’s when a sum of money grows exponentially because the interest is building on itself. So, whatever money you put into a retirement savings account now has longer to grow more interest before you retire, netting you more in the future.

When it comes to retirement savings, you have options.

401(k)

  • A retirement savings plan that an employer sets up for their employees

  • Automatically deducted from your paycheck, so pretty convenient

  • Comes out of your paycheck, pre-tax, so you have less taxable income

  • Contributions are tax-deferred (you pay taxes later)

  • Some employers match a percentage of your contribution, but make sure to ask about vesting (ownership) schedules

Traditional IRA

  • A retirement savings plan that you can open on your own

  • Owned and managed by the individual, not the employer

  • Contributions are tax-deferred (you pay taxes later)

  • Generally best if you are at a salary peak or further along in your career, because of the tax advantages to paying when you qualify for a lower rate

Roth IRA

  • A retirement savings plan that you can open on your own

  • Owned and managed by the individual, not the employer

  • Contributions come out of your after-tax income, so you pay taxes now instead of later

  • Generally best if you are early on in your career and expect to earn more in the future (ie your tax rate will go up)

  • Not available to high earners. The amount you can contribute begins to dwindle at $120,000 in income for single filers and $189,000 for those married filing jointly.


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And there you have it. Five lessons in five(ish) minutes.

That’s not to say any of this is easy - building a solid financial foundation is no walk in the park. But it can be a lot easier to manage with the right plan. That’s what we’ve tried to lay out for you: best practices and tools you can use to get in control.

Nail these basics, and everything else is gravy. If you find yourself with additional cash, you can pay off student loans early, start investing, or save for a big purchase, like a home - all from a position of strength and confidence.

Haven’t had enough?

This material has been prepared for informational purposes only, and should not be relied on for, legal, tax, or financial advice