Should I refinance my student loans?

Photo by Scott Graham on Unsplash

Good question. We know this topic can be confusing and lots of the information out there can be daunting. So let’s break it down —

What does refinancing mean anyway?

Refinancing is just changing the terms of your student loans, usually in order to save money on the interest you pay. You typically refinance by moving your loans from one lender to another.

How does it work?

First, you begin your search online to look for lenders who may be offering a better interest rate than your current rate. A good, reputable place to start that Citizen One recommends is Student Loan Hero.

Then, you fill out an online application from a lender. You’ll put in some basic background information regarding your income, your current student loans, and your credit history.

After that, the lender will run a credit check to see if you qualify. At the end of that process, they will offer you some options for loan terms and interest rates and you pick what works best for you!

Once you accept a particular set of terms, your new lender will send checks or electronic transfers to your old lender to pay off those loans. And voila- you’ve now moved over your loans to a new lender with better terms!

But should I refinance my student loans?

Well… it depends. As of the writing of this blog post in September 2020, interest rates are are incredibly low, so it’s a good time to strongly consider it. Also, here’s a handy chart to help you figure out refinancing is a good idea for you…

You should consider refinancing if…You should not refinance if...
You just graduated undergrad or grad schoolYou are still a student
You have a job with proof of incomeYou have no income
Your credit score is 650 or aboveYou are on an income based repayment plan
All of your current loans are in good standingYou are planning on doing public service loan forgiveness
You want your loans gone fast while paying the least amount in interest over timeYou have loans past due and/or in default
You want forbearance/deferment options if financial need arises

How much can I save?

You can save a lot! How much exactly?

For example, if you have $20,000 in student loans at 6.8% interest due over 10 years and you were able to refinance those loans to a lower rate, say 4.25% interest over 10 years with a new lender, you would save the following –

Original LoanNew LoanSavings
Original Principal$20,000$20,000
Total Interest$7,619$4,585+$3,034
Monthly Payment$230 / month$205 / month+$25/month
Interest Rate6.8%4.25%+2.55%
Term10 yrs10 yrs

So, as you can you see, you would save $3034 dollars in interest AND decrease your monthly payment! Not a bad deal. Want to run your own numbers? Check out this student loan refinancing calculator.

The verdict

To summarize, if you have a decent credit score, a steady income and plan to make monthly payments, you want to and are able to get rid of your loans in a timely manner, then refinancing is a no brainer! Do it! You can literally save $1000s by refinancing.

Also, don’t refinance without getting a bonus check – most lenders will do it. We at Moneyland recommend Earnest and have good experiences with them. So, if you decide to refinance with them, please use our referral link and get a $200 bonus for yourself!

Prime Directive: You need healthcare

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Healthcare is expensive, there’s no way around it. Unless you’re a financially independent multimillionaire who can afford to pay tens to hundreds of thousands of dollars without blinking an eye if you or your family’s health takes a hit, you need health insurance. Period. 

Sure, if you’re a young, single 20-something you may feel invincible. You argue you’re trying to build a new business or work as a contractor or at a small firm that doesn’t offer health insurance and are thinking about going without. DO NOT DO IT. Just don’t. 

Accidents happen. Unfortunate surprises pop up. An ambulance ride alone can cost $1000 – even with people with insurance! God forbid you’re diagnosed with a new chronic medical condition. 

Healthcare premiums are about $3000-4000 per year for young folk – you can get your estimate here –  Kaiser’s Health Insurance Marketplace Calculator.  That’s a small price to pay to mitigate a possible looming financial disaster if anything happens to your health. 

Yes, yes, it’s expensive. We get it. Yet, it’s definitely worth it. 

ER visit? With insurance, it’s at least $100 just to walk in the door. Then the lab work, imaging studies, etc. Insurance usually will pick up 60% or more of that cost. Without insurance? ER visit for a minor problem (e.g. have a small laceration) will cost you at least $1000 out of pocket. Annual check up? Usually free or only a small co pay $40-60 per visit. Without insurance? Try at least $200-300. 

Now if you’re healthy, just go for annual check-ups, does a few episodes of care make up for that $3000-4000 / year price tag for health insurance? Yes. Again, you don’t know when bad luck will strike, so going without is not a good idea. This is a prime directive. 

Need some health insurance? Check out – https://www.healthcare.gov/

Do you really need a budget?

Yes… and no….  here in Moneyland citizens are directed to live below your means and maximize your savings rate. Do you know if you’re doing that? Do you know what your savings rate is?

If you don’t know the answers to these questions, then yes, you definitely need a budget. At least a temporary budget.

Why don’t we like ongoing budgets in Moneyland? One simple answer: variable expenses. 

Vacation, buying a car, buying a home, sending the kids to summer camp, paying off a medical bill, tuition, etc. are large, one time, variable expenses. Yes, ‘budgeting’ and saving for these expenses is important, but trying to use a monthly budget to plan for these and to keep track of every cent in a monthly accounting record is going to drive you crazy and is really not worth the mental energy to do on an ongoing basis. 

However, you will need a global view of your financial situation. When you’re just starting out or making a significant life change (moving, new job, new child), you definitely should budget out your fixed monthly expenses such as rent, car/loan payments, utilities, etc. and also track your (relatively) variable expenses – groceries, dining out, travel, ‘lifestyle’ expenses, etc. for at least 3-6 months.  This will give you a good sense of your current (or planned) financial situation. Next, look for areas to cut back — do you really need that Hulu subscription? Expensive car lease? Do you need to spend $200 a month at Starbucks? Make adjustments, and maximize savings. 

But what matters most? Your savings rate. 

What is your savings rate? It is your total savings divided by your gross monthly earnings. For example, if your monthly gross (pre-tax) income is $6,000 and you save $900, you’re in an okay spot – with a 15% savings rate ($900/$6000 = 0.15 or 15%). Note: yes, you can include your employer’s 401k match if you have it!

But what exactly, is your savings? It’s everything. You want to go on vacation? Retire? Pay for a wedding? Have an emergency fund? Pay for your kid’s college education? Got to pay for those large, one time expenses? That’s your savings. 

As you can imagine,  15% is just not enough. If that’s all you save for retirement alone, it will take 43 years of work until you can retire! That’s a long time. Too long for most of us here in Moneyland. Check out how many years it’ll take you to retire based on your current savings rate on the retirement calculator on Networthify 

So, what’s the ideal savings rate?

We here at Moneyland say at least 20-30% of your gross monthly income should be saved. At least 15% of that should be used for ‘retirement’ savings and the remainder 5-15% should be used to save up for those big, variable expenses. This is just enough to get by. Want to retire early? Get a sizable down payment on a dream home? Have a comfortable emergency fund? You’ve got to save more than that – usually up to 40-50%! 

Another good way to think about this is to say that you’re only going to live on 50-60% of your gross income and plan your spending accordingly, especially when looking for a new job, new place to live, or any other big financial life event. Can’t imagine living on that little? Well, cut your expenses, increase your income, or find a partner with a job.  

As you can imagine if you can save a significant amount,  this further makes having a budget truly not matter. If your savings go into separate account(s), then what’s left in your checking account is fine to spend on whatever you want! 

So who cares if you spend $250 a month on Starbucks if you you’re saving 50% of your income? If Starbucks is that important to you, does it really matter? No, it doesn’t. Budgeting and doing daily accounting of minutiae is touted  by so called personal finance ‘experts’ (looking at you Suze Orman …) but it drains your mental energy by pouring over countless transactions and questioning every $1 purchase to the point of neurosis as if those expenses will alter the course of your life. News flash – it likely won’t. Yes, you must live below your means and you must maximize your savings rate, but you can also enjoy your life in the meantime. 

Don’t waste your mental energy counting pennies, set your savings rate, protect that money and spend the rest however you see fit.  Once you’ve examined how you spend your money with a few months of tracking a budget, you can forget about it.

Want to get a quick, easy look to see how you’re spending money? Check out Personal Capital – it can give you a quick look at all the money coming and going in your accounts. 

So how exactly do you save your money? What accounts should you put your savings in? Should you invest it in stocks? Answers to this and more are coming up with our next posts! 

Don’t agree? Think you need a budget (YNAB)? Comment below

COVID-19 and why you need an Emergency Fund

Photo by Jon Tyson on Unsplash

As I write this, we are in the middle of a global crisis. COVID-19 has engulfed the planet. Hundreds of thousands of people have been inflicted resulting in thousands of deaths. Not only is COVID-19 wreaking havoc on the lives of countless people across the world, it has also wrecked national economies. Businesses have lost millions in revenues. People have lost their jobs, have been forced to take unpaid leave or have had their paid hours cut back.

The U.S. gig economy has been tested like never before, and is showing signs of buckling under the pressure, as unemployment in the U.S. has hit all time highs. To buoy this sinking ship, the federal government has crafted a massive bailout.

Still, those living paycheck to paycheck are in deep trouble. According to a 2017 study, 40% of Americans couldn’t come up with $400 to cover an unexpected expense. This does not bode well for those workers affected by COVID-19.

But the Citizens of Moneyland should easily be able to weather this economic storm. We citizens understand that we need an emergency fund to cover at least 1-3 months of living expenses, ideally 3-6 months. This is a high impact directive. Our realized citizens will have at least 3-6 months of living expenses saved.

Directive: You Need an Emergency Fund

Photo by Hush Naidoo on Unsplash

Why is this important? Because it’s critical financial insurance against the uncertainties of life. Insurance against all the COVID-19 crises, the car repairs (or fires), the puppy’s vet bill, the inevitable surprise medical expense, and the myriad of other unexpected bills that pop up without warning.

COVID-19 and life’s other emergencies will hurt less if you have the financial security to protect against them. An emergency fund is an essential blanket you need to weather life’s storms. It is a must have and a prime directive of our leader. Fully realized citizens of Moneyland will have an emergency fund of at least 3-6 months.

How much should I save?

Start small. Fledgling citizens may try to save up at least 1-3 months of your essential monthly spending. This includes rent, food, debt obligations, and utilities with a little extra cushion just in case. Fully realized citizens should have at least 3-6 months saved.

Where should I keep this emergency fund?

Not under your mattress. Any cash not earning interest is eroding away to nothing with the endless march of time and it’s right hand man – inflation. Keep your emergency fund in a high interest savings account, such as Ally. Sure, you can also keep some cash under your mattress too, just in case. Regardless of where you put it, your money needs to be liquid – readily accessible cash you can get on short notice.

But I can’t possibly save $1000s?!

That’s ok. Start small. Try a $500 or $1000 goal at first. But, you will not be a fully realized, financially independent citizen of Moneyland until you have at least 3-6 months of living expenses saved. You will feel better when you do. Trust this directive.

Your fearless leader,

Citizen One

Don’t agree with your leader? Have some thoughts about emergency funds? Comment below.

Welcome Citizen!

We are building a nation of financially independent citizens through the dictates of our leader Citizen One and the ideas generated from our collective. We seek a free life, the liberty of financial independence and the pursuit of early retirement. We will eliminate debt, live within our means, and become financially independent.

While the focus of our nation may revolve around money and financial independence, we recognize that money is not all there is to life. Money’s importance is dwarfed by the immensity of family, friends and community. We recognize that much harm has been done by forgetting this fact. We vow not to forget this as we pursue our own financial independence.

With that, let us begin.

Your fearless leader and fellow citizen,

Citizen One