2015 was a roller coaster – I was working towards graduating with honors in my bachelor degree program, trying to get a full-time job in my field, and sifting through the stacks of old student loan information that I had conveniently forgot about for the past four years while in college. I was also dealing with a lot personally, namely breaking up with my boyfriend of 4 years and moving back in with my parents and sister.
Right before graduation in May, I figured out that I owed around $100,000 in student loans. That was especially nerve-wracking since I didn’t have a permanent job! At the time, I was working a short-term position at my former internship, which ended in August.
In August, I moved back in with my parents, and had some important conversations with them about my financial situation. Namely, I asked them how long I could live at home, if they wanted me to pay for rent, food, health insurance, etc., and if they would have my back in an emergency. They said they would cover me in an emergency, so my emergency fund exclusively consisted of $500 in my checking account for seriously unexpected expenses. To come up with this number, I asked myself “How small of an emergency fund would still make me feel safe?” and my answer was $500 (my credit card limit at the time).
I started a new part-time job in August, and a new full-time job in September. In September, I also started tracking my expenses and income using a program called YNAB. In November, I started repaying my student loans, and I consolidated and refinanced my high interest student loans for a new, lower interest rate. At the time, I estimated I could pay $2,000 per month and be paid off by June 2018 (2.5 years).
At this point I had passed several critical milestones in my journey to financial independence, including graduating, landing two jobs, quantifying the amount of debt I had, tracking my finances, starting my emergency fund, and beginning to repay my student loans. However, the most important thing I did in 2015 was NONE of the above.
What was the most critical step in my FI journey? Defining my priorities and creating a 5-year action plan.
Table of Contents
Priorities
My priorities were enjoying my twenties while aggressively paying down my student loans. Things I absolutely intended on spending money on? Enjoying life, i.e. travel, experiences, and sports. Things that were off the table? Moving out and paying rent, getting a new car (and car payment), and buying objects and gadgets.
My priority list was as follows:
- Have fun
- Pay off student loans
- Expand saleable skill set (to increase income)
- Reduce expenses in order to save/invest
- Begin journey to independence (location and financial)
Specific Goal
I defined my goal in a way that was specific and measurable – financial independence by 35 years old, which is 13 years from 2015.
Action Plan
Next, I grabbed my financial planning notebook and I drew out a 5-year plan. For the first 5 years (until 2020), I will divert money that I would otherwise be investing to paying off my debt, and achieve an 80% “savings/paying off debt” rate by living at home and increasing my income. I decided I would axe my living expenses when I moved out by building and living in a tiny house, that I would increase my income by doing part-time work on top of my full-time job and by starting a business.
I also wrote a list of things I’m willing to defer early retirement for such as travel opportunities (specifically Antarctica), a pay cut to work remotely, and peace of mind from paying off debts. Then I wrote a list of things I’m not willing to defer early retirement for such as a dog, starting a family, material goods, a house, or a new car.
Finally, I wrote out a 5-year plan that included year by year steps for reducing expenses, increasing income, paying off debt/investing, becoming self-employed, and achieving location independence.
Stats
Expenses
I began tracking my expenses in September, so the below stats are from September to December 2015 (4 months):
Student Loans: $9,750 (a lot of this money was previous savings rather than new income)
Automotive: $420
Misc: $350
Objects: $265
Food: $230
Enjoying Life: $175 (paintball, 5k)
Losses: $15
$1,455 in expenses and $9,750 towards student loans = $11,200 spent in 2015
*All expenses rounded to nearest $5.
An interesting observation about the spending in this period: I spent a good portion of my expenses on clothing and gear for my job. These items were pretty much all necessary, and some of them were reimbursed by the company, but I never though much about how getting a job could cost me money.
Net Worth
September 2015: -$102,800
December 2015: -$99,200
Change in 2015: +$3,600
Extra Income
Part-Time Income: $560
Additional Full-Time Pay: $290
Selling Stuff Online: $145
Total Extra Income = $995
Savings & Investments
Emergency Fund: $500
Investments: Began contributing to my employer 401k just enough to get the employer match.
In a year that was a bit of a whirlwind, I feel like I really got my financial house in order. Defining my priorities and setting goals was the most important part of this process. That’s what helped me keep my expenses low, work two jobs at a time, and start taking steps in the right direction towards eliminating my massive student loan debt and bringing my net worth up above -100k. Looking at the numbers is daunting, but having an action plan to help me achieve my goals helps me break up this giant, scary goal of paying off 100k in debt and achieving financial independence by 35 years old into smaller actionable steps.
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