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Delflating Inflation

Inflation Can Be Deflating

Long gone are the days of piggy banks, and stuffing money under your mattress for safekeeping. There is an invisible force working to take that money away from you. Just because you can’t see it doesn’t mean you won’t feel it (especially in your wallet). That force is inflation. Inflation? Inflation.

Now what exactly is inflation? Basically inflation means prices go up, and the value of your money goes down.

Now let’s go over a little scenario.

Say that you currently have a lifestyle that you need $50,000 a year to maintain. Get ready for a cold reality check on the power of inflation. The average rate of inflation is about 3%, so let’s see what that entails…..

Year Income Needed
1 $50,000
5 $56,275
10 $65,238
15 $75,629
18* $82,642
20 $87,675
25 $101,639
30 $117,828
35 $136,595
40 $158,351

*average length of retirement is the USA

As you can see, in 25 years, you’ll need over 2x the amount of income you currently have, just to maintain your same lifestyle. In 40, that number goes up to 3x your current needs.

Inflation is a powerful force that needs to be accounted for. You can’t combat it by putting your savings away in something that won’t start earning interest for you. You need to INVEST! Invest in stocks, invest in bonds, invest in real estate, invest in yourself. Whatever you want to do, and whatever you feel comfortable with. But, before you jump into anything make sure you do your research. YOU can beat inflation, all you have to do is DO IT!

Student Loan Attack Plan

Like countless other college graduates, I have the burden of student loans bearing down on me. I have my Bachelors and Masters Degree in which I completed in the Spring of 2016. I’m responsible for paying back just over $35,000 and will have a monthly payment of $300/month for approximately 19 years. That’s a whopping $68,000 I will have paid before I’m finally debt free at the ripe old age of 45, which is about average I am fortunate as I know others are in a much worse position. We’ll be offering classes in the future that will help our readers create custom attack plans for any situation to take down their debt.

To provide some context, I’m not able to pay off a couple thousand dollars a month like my friend. I own a house, have two vehicle payments, and my first child to arrive in June this year. My wife and I are both school teachers so combined we make approximately $90,000/year before taxes.
To be clear, I’m an advocate for most people to college. Look for a post on this later. If it were not for these student loans, neither my wife nor I would’ve been able to receive a degree. And if it were not for our degrees, we would not be able to buy cars, houses, or afford children!

Here’s my game plan:

Once we began earning a consistent income, we did the smart thing and set a budget. But when we created our budget, we didn’t live within our means, we lived below our means. So we’ve been accumulating a surplus of roughly $500 every month that is going directly into savings. I recommend having 3-6 months’ worth of expenses in your emergency savings before you can start using your extra cash. (Note: the minimum payment for all debts is included in monthly expenses.) After our savings reaches our preferred amount, it’s time to go toe to toe with my loans…

I have two options that have roughly the same total payoff amount, but one is much simpler than the other.

Half of my loans are federal and the other half is privatized. There are a total of six loans with all different interest rates. Strategy #1 would be to make the minimum payment plus my aforementioned excess of $500 every month. It’s often important to pay the loans with the highest interest rates first, but not always, in order to minimize the dreaded accruement. Strategy #2 is to refinance and take out a personal loan from a bank to pay off all of my student loans and have a single loan with a simple interest rate. There are two big catches with this, however. You have to have a good credit score to get a low rate and you will no longer be able to write off the interest on your federal taxes.

Making payments in the current system is difficult because I have to log in, mail, or call two different agencies and specify the fluctuating amount for all six loans every month. With a personal loan, I will be billed the exact same amount every month and can leave it on auto pay.

We have decided to take out a personal loan for $35,000 at 11% for a monthly payment of $761/month for five years. The total payoff will only be approximately $46,000! I will save over $22,000 and be debt free 14 years sooner than if I just made the minimum payments! You will have to do the math to find out which strategy is best for you, but we’ll talk more on that later. Here’s the good kind of principle to live by: If you sacrifice now and live below your means to pay off debt, it can save you thousands and thousands in the long run.

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CB

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The $5 Savings Plan

It’s ideal to have 6 months of expenses in your savings, but that can often be a daunting amount. Not everyone is in a position to set aside this kind of money, but it’s important to start somewhere. When I was in college, I used what I called the 5 dollar savings plan. It was simple – every time I ended up with a $5 bill in cash, I would stow it away in my secret box. Why President Lincoln’s face, you ask? Setting aside $1 bills would take a long time to save anything substantial and the disappearance of a $10 or $20 bill was always felt more. Five bucks was the perfect amount as it’s an amount that could be “lost” without being noticed and could add up to a moderate savings before you know it. I worked a meager minimum wage job in college so the cash wasn’t exactly flowing in and out of my wallet, but despite this I was able to save nearly $1000 in just my first year! Now that (to me at the time) was substantial. Consider the average millennial only has that much in their savings today and it’s not a bad start.

However, it’s important to be realistic about this savings method and it’s not for everyone. You’re probably not going to retire at 40 on the beach because you stashed all your $5 bills. Also, if you’re making $50,000/year, you should be putting more than ~ 83/mo away! It’s primarily a method for individuals who have little or no savings at all to develop good habits. I know it’s tempting to see a slight excess in money just sitting in your account after all the bills have been paid, but it’s important to be disciplined with your extra fluff. Paying down debts or saving for the unexpected is much more responsible and wise than blowing it on fancy clothes or other expendables you could live without.

Be sure to subscribe to our greenbelts newsletter so you get all of our insight here at The Money Dojo!

CB