Budgeting Under the Burden of Student Loan Debt
Every week, there seems to be a new story about someone climbing out of crushing student debt. But beyond the headlines, you’ll usually discover a common theme – these people already had a good job and were able to make extreme sacrifices to their budget like selling a car or living at home for a few years. You too can be debt free they say, if you just move back in with your parents, sell all personal belongings, work three jobs, and save 98% of your salary. It’s easy! But reality often interrupts in these situations and paying off six-figure debt in two years isn’t realistic for the average college grad.
For most borrowers, budgeting is the fastest way to get themselves out of debt. You don’t need to save every penny you earn, but mapping out a budget makes it easier to get your expenses under control. And remember, a budget isn’t just a list of bills. It’s a financial roadmap for every dollar you earn. And if you’re being crushed by student debt, you can’t afford to waste any of those dollars.
Where Does Your Money Go?
When was the last time you combed over a bank or credit card statement? Apps like TrueBill and Mint can show you how much you spend on various things each month. If you’re like this writer, you’ll be blown away by the amount you actually spend on food you don’t make yourself. With a budget, you’ll figure out exactly what your spending on food, utilities, rent, debts, and fun.
When I went through my monthly spending on Mint, I couldn’t believe how much I spent at restaurants and bars. And not only on food and drinks, but Uber rides to and from as well. I found I was spending 25% of my monthly pay on meals I could easily make at home. A cheeseburger costs $11 at the sports bar and about 75 cents in your home kitchen.
Luxuries vs Necessities
Making the distinction between luxuries and necessities will be a difficult part of the budgeting process. Lifestyle creep can sneak up on you, especially if your friends start buying new cars and renting fancy apartments. Luxuries have to be minimized when you have heavy student debt. Living above your means will only increase your debt load and put yourself further from financial freedom.
But again, this doesn’t mean becoming a hermit and reading books by candlelight. You’ll need social activity to stay sane and entertainment while you’re at home. Differentiating between luxuries and necessities means buying a used car instead of a 2018 model. Or living with roommates if rent is too high and getting a Hulu subscription instead of a premium cable package. You can still grab greasy food at your favorite restaurant every once and a while (fun has a place in your budget too), but maybe spend a couple Saturday nights each month cooking dinner for yourself.
Fun Is Also An Expense
Going out with friends usually means spending money at some point. Tracking spending becomes a lot easier if you recognize social gatherings as budget expenses. Maybe don’t tell your friends that, but budget a set amount for fun at the end of each week. If you make $2000 a month, give yourself like $75 – $100 each weekend for fun. If you don’t spend it all, roll it over into the next weekend or make a bigger student loan payment that month.
The best way to avoid temptation is carrying cash. Swiping debit and credit cards makes it difficult to tally up spending in your head. If you put a couple $20s in your wallet, you’ll know exactly how much you’re spending and won’t go over your weekly budget.
Putting Your Budget On Paper
Remember Microsoft Excel? A spreadsheet is your best friend when putting a budget down on paper. How you split up your spending is up to you. The 50-30-20 method is a popular one where you take your after-tax monthly income and divide expenses into categories – 50% Needs, 30% Wants, and 20% Financial Goals. But if you’re struggling with student debt, only spending 20% of your paycheck on loans and saving is probably a stretch. With a $2000 monthly income, you’ll only have $400 to spend on loan payments, emergency savings, and retirement plans. Adjusting this formula to 50-25-25 (or even 50-20-30) might be better suited for people with student debt.
Needs are things like rent, car payments, utility bills (no, Netflix is not a utility), and healthcare costs. If you can narrow these expenses down to 50% of your monthly pay, a 50-25-25 plan might work for you. But if these costs take up more than 50% of your income, you’ll need to take away from the middle category. A budget of 55-20-25 might work better for those living in expensive cities.
Budgeting is difficult to keep up with and forces us to make choices we don’t really want to make. However, heavy student debt loads make budgeting a necessary evil. If you have the resilience to draw up a budget and stick to it, your finances will steadily improve and debt will become manageable. If you want help building a budget, you don’t need a financial advisor. Personal finance sites like NerdWallet and Mint have budget calculators anyone can use, check them out and discover where you can reduce your spending.
Dan graduated from college with a degree in journalism and about $25,000 in student debt. He luckily landed in a career that allowed him to pay his loans off at a reasonable rate, but not without making some sacrifices (sorry grandmom). Dan buried himself in personal finance books to better manage his debt and start saving for retirement. He thinks $25,000 is more than enough to pay for a good education and is stunned by some of the near six-figure balances he sees student borrowers carrying around.
Born 45 minutes north of Philadelphia, Dan went to Penn State in 2004 to pursue a journalism degree with a minor in political science. He graduated into the worst recession in 80 years and got his first post-college job serving hamburgers and Miller Lite. Dan eventually settled in as a purchasing agent at a printer manufacturing company, which isn’t a profession you’d think would be #2 on a journalist’s list.
Dan now lives in Doylestown, PA with his girlfriend, who herself graduated with over $80,000 in student debt after getting an education degree from Arcadia University. Seeing a new teacher forced to pay nearly $1000 a month in loans drove him to action and LoanGifting gave him a platform to not only help his significant other, but all kinds of borrowers struggling with student debt. Dan’s hobbies include Texas Hold ‘Em, making friends with dogs, and watching the Eagles’ Super Bowl win on DVR twice a week.