# NMHD Budget Clinic – Episode 6 – The 28-Month Miracle

Check out the video at the bottom of this post for the visual version of my write-up.

So let’s say Max chooses to pursue Warrior mode and saves \$9k per year. Okay…so what, now what? What should he do after he has the \$9k, and why does it matter?

\$9k of annual savings will allow Max to pay down his student loans in 28 months rather than 120. Tactically speaking, Max will pay the regular \$299 monthly payments for the first 12 months. According to the loan prison sentence, (i.e., loan amortization schedule), he’ll pay \$1,880 in principal and \$1,710 in interest. At the end of this year, he’ll have saved \$9k which he’ll use to pay down the next 60 months of principal. He’ll have to pay only \$137 in interest, which is the interest that accrued from his month 12 payment to his big \$9k payment. In other words, he doesn’t have to pay \$5,425 in interest that the loan prison sentence indicates during those 60 months because Max is getting time off for good behavior, where good behavior is defined as paying off some of the loans early. (He’ll technically need \$9,137 to make this happen.)

In year 2, which is actually year 6 according to the loan prison sentence, Max will make another 12 monthly payments of \$299 while he saves up another \$9k. Then, at the end of year 2, he’ll take that \$9k to the bank and put it all towards principal, which will go towards 48 months of principal and take him up to the beginning of year 10 of the loan prison sentence. He’ll also need \$71 for the interest that accrued between his last year 2 monthly payment and the big \$9k payment. (So he’ll technically need \$9,071 to make this happen.) \$71 is much better than the \$1,690 he would have paid if he had made only the regular \$299 monthly payments.

He’ll now have been paying his student loans off for two years, but his early payments will have taken him up to the tenth and final year on the loan prison sentence. At this point, he’ll have to make only four monthly payments of \$299 while he saves up \$2,300 to pay off the rest of his loans.

By cutting back and taking on some odd jobs and selling things, Max can save \$7k of interest and 92 months (7.7 years) of his life. On average, he’ll make a monthly payment of \$823 during those 28 months, or \$524 more than the regular payment, but he’ll get out of debt 7.7 years earlier. I’d say that’s definitely worth it.

Understanding how a budget will impact your loan pay-off schedule might be the single most motivating thing you can do for yourself. I highly encourage you to spend a lot of time in the worksheet below and understand what the formulas are calculating in the loan amortization schedule. Then build out your own budget, get your own loan prison sentence online, and see how your savings will shave years off of your student debt.

Click the image below to access the worksheet with Max’s loan prison sentence.

Emergency Savings
Max’s \$9k of savings will accrue fairly linearly, which is to say that he’ll have about \$750 in savings after month 1, \$1500 after month 2, etc. If some sort of emergency or surprise expense were to hit him right after he makes the \$9k monthly payment, he’d be in trouble, but otherwise he’ll have considerable resources to deal with emergencies after the end of month 1. To be safe, many experts recommend having about three months of living expenses in savings. Living expenses are things like food, rent, fuel, electricity/water/gas, etc. These numbers will vary whether we’re talking about Max or a single mother.

While I was paying off my \$90k of debt, I personally chose to keep about \$1k in my emergency budget which wouldn’t even cover a single monthly mortgage payment, let alone food, fuel, etc. Thankfully, nothing happened to me during this time.  To be conservative, Max should save up an emergency fund and then plunge headfirst into Warrior mode while keeping his emergency fund untouched.

Reminder: For best results, view this clip in full screen and set the resolution to 1080p.

Course Materials

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### 20 responses to “NMHD Budget Clinic – Episode 6 – The 28-Month Miracle”

1. What’s the logic behind saving through the end of the year rather than paying as much as possible each month? Is it to have an emergency reserve? Great episode. Thanks!

• Exactly. The major upside to annual lump sum payments is that for 11 months out of the year, you have some sort of an emergency reserve.

It’s worth pointing out that the alternative to this, the pay-as-you-go method–where every spare dollar outside of a fixed emergency reserve goes towards the loan–has a couple of upsides that the other method doesn’t. First, even less interest will accrue on the loans because you’ll be making extra payments towards principal earlier than the \$9k at the end of the year. Second, pay-as-you-go works really well for folks who would otherwise spend the money. It’s impossible to buy something you don’t need when you just gave the bank your last \$300 and all you have left is something in the emergency reserve.

• Cool. Makes sense. Thanks!

2. Did you consilidate your loans to get one payment and interest rate? My husband and I have 12 different loans between the two of us, whith interest rates ranging from 4.5%-6.8%. If we do not consolidate, how do we choose which loan to begin paying first?

• Good question. I looked into consolidating but the interest rate the bank offered me was higher than the weighted average of my loans, so I took them out one by one.

Dave Ramsey recommends the snowball method where you go pay down your smallest loan regardless of interest rate and then direct the monthly payments that you used to have towards your other loans. As you take out your loans, your debt snowball becomes bigger and bigger as if it were a ball of snow rolling down a snowy hill, picking up speed and inertia on your way to debt freedom. The psychological benefits are huge–this is what I experienced, anyway. The alternative is to go after the loan with largest interest rate because it’s collecting the most amount of interest on a daily basis so you stand to gain the most by eliminating it the soonest.

Note that the two methods aren’t mutually exclusive–your smallest loan might also carry the largest interest rate, which would be sweet.

3. Reann

Been too long since last post. Please post soon! 😊

4. debtnthecity

Dude, it’s been a while since your last post!

5. I’ve enjoyed reading your experience. It’s inspiring to hear a great success story! I love hearing how you got creative and made sacrifices. And how awesome that you got done early!!

My husband and I are doing something similar. We’re working on paying off student loans from law school (my husband graduated with a JD/MBA last year). We have three kids and don’t make as much as you, but we are trying to tear through this debt asap and taking extreme measures to do so. We have paid down over \$35K in the past year! We have \$102K to go and plan to have it paid off in three years.

I started a blog to document our journey (personal finance made public, numbers and all) and share frugal tips. I’d love it if you’d stop by and/or add me to your blogroll.

• Added! The title is a brilliant play on words and you have some solid topics on there. Good luck.

6. Ben

Joe,

I love your energy and how you have helped so many people. I have a college sophomore and soon to be college freshman next year and your budgeting worksheets are invaluable. Keep up the great work.

Ben

• Right on, man! Thanks for the note.

7. Irene

I spent last week reading your entire blog (I just couldn’t stop reading) 🙂 Great work! Best regards from Finland.

8. I’ve devoured your blog and I’m very grateful. I know you are probably busy with work and life, but I’m waiting for your next episode. 🙂 Thanks for all the help.

9. Cmgr

What’s the point of saving \$9k per year and paying it in a lump sum? Why not just pay more toward the principal each month as you go?

• You definitely could–I guess you could call it “Debtor’s Choice” 🙂 You’ll cut down on the interest that accumulates, but you won’t have an emergency reserve. Scroll up to see my response to anylight who also asked this question.

10. Hey Joe!

You’re one of the major inspirations for my new blog – My Debt Emergency. Just started it today. I have \$175,000 in student loan debt and I’ve been in denial about it, since I’ve preferred to not think about it until now. By reading your blog and researching more about personal finance, I feel empowered to take on this debt monster head on. Thanks for being an inspiration. Feel free to check out my blog and add it to your blogroll if you feel it’s worth sharing with others. Thanks so much for everything you’ve done to show me that it is possible to eliminated student loan debt!

• You have my support! Always good to see somebody destroying their debt. Added.

• Thank you!

11. Mike

Call me some sort of weird stalker, but I’m extremely interested in what your current lifestyle looks like. It’s now April of 2015, and you’ve long paid off your debt. Have you reverted back to your consumerist ways? A little? I’m very interested in your exploration of frugality/simple living as a lifestyle rather than merely a temporary sacrifice, and which aspects of your NMHD lifestyle you found sustainable, and which ones you had to kick to the curb once the debt hanging over your head was gone. Are you still living the same frugal lifestyle and channeling your income into productive investments? Please share! This blog very much needs an update.

• Mike, thanks for your interest. Great questions, and really glad you’re curious. I fully expect to write a post next April detailing how I paid off my \$250k mortgage. I’m saving, saving, saving. In short, I still pack a lunch for work every day and make my own dinner five to seven days a week, still driving a used car (6-year-old Nissan), I am traveling and entertaining more than NMHD but nothing excessive, and I’m still budgeting down to the dollar every single month and tracking progress to my early mortgage pay-off.

I do put 15% of my salary to my 401k and won’t cash out the 401k to pay off my mortgage, so it’s taking a bit longer than it otherwise would.