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Money Coach

Student Loans and Your Budget

Irish humorist Joseph O’Connor once said that “I feel these days like a very large flamingo. No matter which way I turn, I have this large bill attached to me.”

While O’Connor aptly states the emotional condition of the high-dent sufferer, there’s no need to flap your wings over a big student loan bill. No need, that is, if you know how to control your debt.

The idea here is simple. Control your debt by managing your lifestyle.

Consequently, the key to controlling debt is to first try to live as inexpensively as possible. If that means renting an apartment with a roommate or bringing a bag lunch, then so much the better. Once you pay off your student loans you can ramp up your lifestyle, as you’ll have more cash at your disposal.

Let’s start with a household budget. Without going through the punishing ordeal of ranking your spending priorities, it is difficult to guarantee you will have anything left over at the end of the month to pay your student loan. If this sounds too taxing, then use the paperless budget method. Start by holding back a reasonable portion out of every paycheck to pay down your student loan and other debts and force yourself to live on the balance.

If every now and then you come out ahead, be sure to apply your windfall to eliminate
student loan debts before you start to accumulate savings. This makes sense for a number of reasons. Borrowing rates typically exceed savings rates. Interest expense is usually non-deductible, whereas savings are taxable. Interest charges are a certainty, but investment returns are volatile.

Sure, these terms seems dry and boring. But let’s face facts – it’s not your father’s economy anymore. In an era where consumer spending is high and there’s plenty of new goods and services to buy that weren’t available even 20 years ago, knowing how to budget properly is a big key to your financial success. According to a recent American Express consumer survey on everyday spending, today's list of typical, day-to-day expenses is still dominated by traditional items such as groceries, fast-food lunches, tolls and gasoline. But they've been joined by such 21st century wallet-sappers like cellular phone service, paging fees and Internet service costs.

Consequently, as everyday expenses increase, managing a household budget becomes more complicated. The best solution? Get those costs into your budget as soon as possible. That’s because people tend to spend whatever money is left over after the fixed expenditures and stop only when either the ATM won't give them more cash or the bank calls.

One way to keep money from flying out of your pocket is to write down what you're spending, as you spend it. You may not realize it, but that glass of Merlot after work, the dry cleaning you picked up on the way home, and that four-cheese pizza you had delivered to your door for dinner all add up. A record of your daily, weekly or monthly expenditures makes for some interesting reading in most American households, testing the patience of millions of spouses in the process.

As I’ve mentioned, some consumers like to use a credit card to buy everything (the credit card companies LOVE to push that strategy). That way, at the end of the month, they have a ready-made laundry list of expenditures sent to them by their credit card firm. Bad idea. Sure, you get a nice, clean list of what you spent each month. But getting into the habit of using a credit card is never a good ploy. It’s easy to treat that Visa card like cash – but it ain’t. Sooner or later you’ve got to pay for it, with high interest payments to boot if you’re not on time every month. Besides, in the age of the laptop, it’s easy to sit down at the end of the day and compile your own list. You’ll have your record and you won’t get sticker shock opening your credit card bill every month.

Published Jan 09 2007, 12:46 PM by moneycoach
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