Organizing Your Loans in the New Year
The new year is the perfect time to plan and think about all of the possibilities for the upcoming year. It is a time to celebrate, as well as to set new goals for health, personal improvement…and wealth.
“Doing better with money” almost always tops the New Year’s resolutions charts , along with eating healthy and getting more exercise. It’s a great goal, in theory, but there’s a problem—it isn’t specific and action-oriented.
Someone who wants to be better about managing their money can start with small, actionable goals that they can work toward in increments. One great way to start is to get your debt organized.
Your loans are an important piece of your overall financial plan. It’s hard to feel financially organized if you don’t understand exactly how much you owe on each outstanding debt and when your payments are due.
Without a clear picture of the framework and organization of your debt, it is very hard to accomplish other money goals, such as spending less, saving more, and maybe even investing the difference.
This New Year, you can resolve to get your debt in order. Below, we’ll provide tips for anyone who wants to learn how to keep track of student loans, personal loans, and other sources of debt, such as credit cards.
7 Steps To Organize Your Loans
1. Track Them Down
Often, the first step is the hardest. Especially if it means resetting passwords. Your first move toward debt organization is to track down all sources of debt, including student loans, personal loans, credit cards, and so on. This may require calling loan servicers, logging online to retrieve balances, or collecting monthly statements. Do whatever you need to do to get all of the information in one place.
Now is a good time to start thinking about how you’d like to keep this information organized moving forward throughout the next year, whether that means keeping hard copies of statements in a binder or folder, keeping copies online, or tracking the information in another way.
2. Put the Information into a Spreadsheet
Once you have all of the statements pulled up or in front of you, it’s time to identify the most important details. You can either enter this information into a spreadsheet or if you prefer, manually write it down in a notebook, planner, or other piece of paper that you will be able to amend throughout the year.
For each loan or source of debt, write down its balance, the loan service provider (and their contact information), the interest rate, how long is left on each loan, and the monthly payment.
As a reminder, student loans and fixed-rate personal loans typically have set terms and the same minimum payment requirement each month (provided you haven’t missed payments or made late payments). On the other hand, with revolving credit, like a credit card, the monthly minimum payment can fluctuate depending on how much of the available credit is being used at any given time.
3. Add up Your Monthly Payments
This is a simple exercise, but it’s important you know how much you’re spending on debt repayment each month. Once you get a total monthly expenditure amount, you can begin to build a budgeting framework.
Depending on the types of loans and debt that you have, and your preferred budgeting technique, you may want to add the balances up by category (student loans, personal loans, credit cards, etc.) or as one. Either way, you should always know how much you’re making in loan payments.
4. Build Debt Payments into a Budget
Now that you know just how much you’re spending each month in debt repayment, it is time to look at this figure in terms of your overall budget.
To finish building a budget, look back on your spending for the last several months. See how much you’ve been spending in each of the essential categories like rent, groceries, utilities, food, and so on. Then add your debt repayment total to get your complete spending picture.
This budget isn’t aspirational—yet. First, understand how much you’re actually spending in each category, and look at whether or not it leaves you with money left over at the end of each month. If the answer is no, how are you making up the difference? Are you dipping into savings? Using more credit?
Finally, once you understand your spending, you can identify your problem areas where you’d like to cut back so that you can free up more money for saving or putting toward debt.
5. Calculate How Much You’re Paying in Interest
It’s always a good idea to know exactly how much you are paying in interest on your debts, if for no other reason than because it is a total eye-opener. Sometimes you can see this within a monthly statement. If you don’t have a breakdown easily on hand, using a tool like a credit card interest calculator can help you out.
If seeing how much you’re paying in interest gives you a mini heart attack, there are options for taking action to reduce this figure. You could make additional or larger payments towards your debt. You may have a set term for a loan, but no one says that you have to take exactly that long to pay it back. Just make sure to account for any prepayment penalties to know for sure if it’s your best option.
6. Refinance Your Student Loans If It Makes Sense
Refinancing is the process of paying off old loans with a new loan, ideally at a lower interest rate. For example, if you have multiple student loans—either federal or private—this could be a route to at least consider.
With SoFi, refinancing student loans is easy, and it takes only two minutes to see if you qualify. (It’s important to note that refinancing your federal loans with a private lender means you will lose certain federal benefits, like forbearance and income-based repayment programs.)
Remember earlier, when you calculated how much you were paying in interest on your student loans? Take another few minutes to look at a student loan refinancing calculator to see how much you could save by refinancing.
Through refinancing, it is possible to consolidate multiple student loans, which can make managing debt and monthly debt payments that much simpler—that’s in addition to the (hopefully) lower interest rate.
It should be noted that while refinancing student loans does effectively consolidate them, federal consolidation programs do only that—consolidate multiple federal loans into one. Consolidated loans use a weighted average of the interest rates on each of the original loans, which might save you on interest… and it might not.
SoFi also offers credit card consolidation using a personal loan. Borrowers with credit cards charging more than a 15% annual percentage rate (APR) may want to consider paying off that debt with a lower-rate personal loan. This can potentially help lessen the burden of high monthly payments so borrowers have more cash to put towards paying off their debt.
7. Identify Sources of Debt You Want to Pay Off
At this point, you probably have a good understanding of how your student loans fit within the framework of your overall budget, and can identify whether you have any other sources of debt that you would like to pay down.
Credit cards are a great place to start. Making only minimum payments on credit cards can cost you quite a bit in interest. In general, when it comes to accelerated debt repayment methods, there are two popular strategies. The first is called the “debt avalanche method,” where the borrower aggressively works to pay down the balance of the debt with the highest interest rate first (while making minimum or monthly payments on all other debt, of course).
With the “debt snowball method,” the borrower picks the loan with the smallest balance, and works on paying this balance off first (while still paying other debts), securing a psychological victory.
Not everyone will have debt repayment they want to expedite, but if you do, you can simply pick one of the methods and go with it. If you go with the debt avalanche method, either highlight or move to the top of your budget spreadsheet the loan with the highest interest rate. If you opt for the debt snowball method, highlight or move to the top the loan or card with the lowest balance.
8. Build an Emergency Fund
This last one might seem unrelated to a post on how to keep track of your student loans, personal loans, and credit cards, but it’s really not. An emergency fund—that is a “cushion” of three to six months worth of savings set aside for expenses—is important for a lot of reasons, but it is especially important to people who are obligated to make regular debt payments.
Say, for example, a person is laid off from their job. Ideally, they have enough money stashed away in their emergency fund that they are able to afford all of their debt payments, as well as pay for other necessities like rent, utilities, and food. This way, they don’t rely on additional forms of credit or debt to get them through a period of unemployment, putting themselves further into the hole.
To get started building an emergency fund, consider opening an account separate from your checking account. If you can, use a cash management account like SoFi MoneyTM. By keeping your savings account separate, you may feel less tempted to spend money earmarked for emergencies.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.