5 Reasons You’re Not Financially Independent
Here are 5 tips courtesy of Forbes as to why you may be struggling financially at this point in your life…a few of which are inevitable & others that we honestly can prevent. Check them out below & let us know what you think!
1) Student Loan Debt
Student loan debt has now surpassed credit card debt, with the average senior from 2012 graduating with almost $30k in student loans. With all that debt, it’s understandable for people to want to pay it off as soon as possible. The article recommends that you make over-payments and have the extra payments directed towards paying off principle.
If your student loan rates are above 6% or you’re a very conservative investor, this may make sense. Otherwise, directing your savings towards paying off student loans may not be the best use of your hard-earned dollars. That’s because with undergraduate Stafford loans currently at a tax-deductible 4.66%, there’s a decent chance that you could earn more by investing your savings than you would save in interest by paying off the loans early. You’ll also save more in interest by paying off any higher interest debt like credit cards first.
Rather than making extra payments in this situation, consider reducing your payments with an extended or an income-driven repayment plan. This may cost you more in interest over the long run. However, it will also free up money that you can use for more urgent priorities like building up your emergency fund, maxing out the match in your employer’s retirement account, paying off higher interest debt, or investing for your financial independence.
2) Credit Card Debt
Unlike “good debt” like most student loans, the interest rate on credit cards is often higher than what you can reasonably expect to earn by investing. While paying off your credit cards right after you leave a store may be a bit extreme, the article makes a good point about avoiding credit card debt. One way to do this is by having an auto-payment to deduct the full balance each month. Another option is to avoid using credit cards altogether as people typically tend to spend more when they use plastic instead of paper.
If you already have credit card debt, see if you can lower the interest rate by refinancing it or even just asking them for a reduction. Then look for savings in your budget and use them to make extra payments towards the debt with the highest interest rate. When that debt is paid off, apply the payments towards the remaining debt with the highest rate. This Debt Blaster calculator shows you how quickly you can become debt free with this strategy.
3) Keeping Up With The Joneses
As Will Rogers once said, “too many people spend money they don’t have, to buy things they don’t want, to impress people they don’t like.” This behavior is what can get you into credit card debt in the first place. Rather than competing with the neighbors on what you can buy, think of yourself competing as to how much you can save.
The article mentions setting up a separate savings account for discretionary expenses. This can be a great way to keep your day-to-day spending under control. But don’t neglect the bills either. In fact, there’s a company called Billcutterz that negotiates your bills for you in exchange for half the savings. You can do the same thing and keep the full balance.
4) Auto Loan Debt
While nobody likes a car payment, auto loan rates tend to be even lower than student loan rates. The average used car loan is about 3% right now. At that point, you’ll almost certainly be better off investing extra savings.
Another way to minimize auto loan debt is to buy used cars rather than new ones. After all, the new car smell will fade pretty quickly but the higher loan payments will still be there. Just be sure to keep up on maintenance.
5) Neglecting Your Credit Report
It’s been estimated that about 70% of credit reports have errors on them so the article’s suggestion to fix any errors on your credit report is a sound one. It’s bad enough to be penalized for our own mistakes. We don’t need to be penalized for other people’s mistakes too.
You can also use sites like Credit Karma and Credit Sesame for free credit monitoring and ways to improve your credit score. Finally, you may want to place a security freeze on your credit reports to prevent someone from opening new credit in your name. You’ll just need to lift it if you want to apply for credit.
After you enjoy your barbecues and fireworks, try to use some of the long weekend to tackle some of these issues. Financial independence is worth striving for. Don’t let these 5 things get in the way.