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.
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.