Got Student Debt?

Getting a quality education is one of the best investments you can make. According to the U.S. Census Bureau a person with a bachelor's degree is expected to make approximately double the salary of someone who only finished high school. With a degree you won't only be making more money, but also performing work that is more engaging and requiring greater mental acuity.

Source : http://www.earnmydegree.com/online-education/learning-center/education-value.html

That being said, it is difficult these days to get a quality education because of the rising costs of tuition. That is why many of us students have to rely on student loans. According to Statistics Canada the average government student debt owed at graduation is $19,500 for a bachelor's degree. It can be very tough to start your life after graduating with such a debt load on your back. Here are a few tips to avoid this debt and to help pay it off sooner.

1) Set Goals - A very close friend of mine had approximately $14,000 of student debt when he graduated. He set a goal to pay off the debt by the end of year. Luckily, he got a job after graduating which paid a yearly salary of about $50,000 a year. This is a good salary, however there are a lot of other living expenses to pay for when you are working, especially away from home. By setting a goal and making the payments he was able to pay it off in 8 months! A whole 4 months earlier than his goal. Write down your goal and it will become real.

2) Cooperative Education - One of the reasons my friend's student loan is less than the average is because he was in a cooperative education program (coop program). A coop program is where you work paid internships as you're getting your degree. Usually you either work an internship over the summer or at some universities you alternate school and work terms in 4 month intervals. The beauty of coop is that you make a pretty decent wage (usually better than minimum wage), get work experience in an industry that you are studying, and make contacts at companies that you may work at after graduating. The University of Waterloo in Canada has the longest running coop education program in the country. I would highly recommend going to the University of Waterloo because of their outstanding coop program (also for their outstanding engineering, math and science programs). One draw back is that the program typically takes 5 years instead of 4, but you'll be leaving school with far less debt and possibly a job!

3) Work Two Jobs - Once you've set your goals you can focus your efforts like a laser. You have a workable time frame in which you wish to pay your debt off. It's difficult to start your "real life" as long as that debt is lingering over your head so it's best to get it off your back as soon as possible. A lot of graduates work two or three jobs simultaneously to try to pay off their loan as quickly as possible. Your second job doesn't have to be glamorous as long as you're getting hours and being paid at least minimum wage. For one summer I was working two jobs simultaneously to save for my upcoming tuition costs. During the day I would work construction and at night I would work selling ice cream at a local shop. It won't be easy, but you can do it!

4) Scholarships, Bursaries, Grants and Debt Forgiveness - There are always tons of scholarships, grants and bursaries that are available to students. Sometimes there aren't too many students who apply since there is so much paper work involved such as: reference letters, writing a letter of interest, transcripts and application forms. People who get discouraged by a little bit of paper work makes your job easier. Since there are less applicants, there is a good chance you can get a scholarship, grant or bursary. There are a lot of special interest group scholarships so it's best to browse through what is applicable to you. Whether you're a woman in science, an athlete or an international student from Pakistan, there are some scholarships and grants specifically aimed to fit your circumstances. Apply to them all and you'll be pleasantly surprised when you get one.

5) Save! - Tuition fees keep increasing every year. There are always extra fees being tacked on. Since the summer, the University of Waterloo has implemented a program where our graduate student card doubles as a bus pass which I think is great. However, now our tuition has increased by about $50/term. Tuition fees continuously increase over time, so it's best to start saving early. This is really a message for those of you who are going to be attending a post secondary institution in the next couple years, or for those of you who have children. Definitely one of the best investments you can make towards your child's future is a quality education. You can open a registered education savings plan in Canada which is an excellent way to start saving for their future. For more information check out: http://www.hrsdc.gc.ca/eng/learning/education_savings/public/resp.shtml. Save early, it'll make a huge difference when you graduate!

Here are two excellent videos about student debt:
Lynnette Khalfani author of "Zero Debt for College Grads"

Dave Ramsey, personal finance expert author of "The Total Money Makeover"

For more information on debt check out:
Know Your Debt
http://reynold-savemoney.blogspot.com/2010/08/know-your-debt.html
Pay Off Your Debt or Invest?
http://reynold-savemoney.blogspot.com/2010/08/pay-off-debt-or-invest.html

Bless John Tesh

On the financial road of life we will all have debt in one form or another. It is critical to be able to distinguish between good and bad debt, so that we can manage and eliminate our bad debt. Check out a previous article which is about this subject: http://reynold-savemoney.blogspot.com/2010/08/know-your-debt.html.

It is also important to note that it is extremely difficult to invest and build your net worth when you still have outstanding bad debt. Yesterday's article was about trying to eliminate the worst bad debt of them all, consumer debt! http://reynold-savemoney.blogspot.com/2010/08/pay-off-debt-or-invest.html.

I've included a couple short video clips from John Tesh's radio program called "Intelligence for Your Life" about getting rid of credit card debt. The John Tesh radio show is one of the best radio shows on the air today. I love how he packs so much useful information in such a short amount of time. Check out the John Tesh website for streaming podcasts http://www.tesh.com/ or try to find him on the radio.

Pay Off Debt or Invest?

This is a simple question which can lead to complex answers. The short answer would be to pay off all your bad debt before attempting to invest your savings. As discussed in an earlier article there are two different kinds of debt and it is important to distinguish between the two: http://reynold-savemoney.blogspot.com/2010/08/know-your-debt.html . But in most cases it's best just to pay off any money that you owe, because it would be terrible to waste your hard earned cash on interest.

So before we delve into the world of investing, it is best to first talk about debt. Now that you know the difference between good debt and bad debt it would be wise to tackle all of your bad debt. This would be your credit cards, vehicle payments, and the mortgage on your own home. Also included in this category should be any student loans. While you were going to school there probably wasn't any interest accruing, however a month or two after you finish school the interest clock starts. So it's best to get that debt off your back as soon as the interest starts accruing or better yet before the interest clock starts.

There's an excellent book by David Bach entitled the Automatic Millionaire. He explains a very simple method of paying off consumer debt (which is the worst bad debt) known as the DOLP system, which stands for Dead On Last Payment. Basically the best way to pay off consumer debt is to pay off your credit card with the lowest balance first, not the card with the highest interest rate. There is an interesting formula to rank which debt to pay off first. I've included a link that allows you to calculate and rank the credit cards you should pay off first http://finishrich.com/dolp/ .

It's important to note that it can be very difficult to invest your money for growth when you still have outstanding debt. An investment can be measured by what is called a return on investment (ROI). This is an annual rate of return that you get on your investment which is measured as a percentage. For instance, if you invested $100 in Company A and at the end of the year you receive $110 on your investment you have just received an ROI of 10%. You just made an excellent investment! However, if your credit card debt of a $100 is charging your 19% interest you're really losing 9% to the credit card companies, not to mention penalty fees for not making payments. So it's important to understand the debt that you're in and seriously consider paying it off before investigating your investment options.

I've included a video by David Bach about his DOLP system. The first minute is him trying to sell his book so I would skip to the 1 minute mark and listen to it to about the 2:20 mark. Let's get that debt off our backs and move on with our lives to a better financial future!

Know Your Debt!

Money can buy almost anything (except love). You can even purchase money with money. The cost of money is determined by interest rates when it is loaned out. Interest is a certain percentage of the total loan amount (the principal) that is paid over a period of time, until both the principal and all the accrued interest is paid off. The longer you hold the loan the more interest you pay. For instance if you were to borrow $1000 (the principal) from the bank at an annual interest rate of 5%, than at the end of the year you will owe $1050. In this case the cost of borrowing for over a year was $50.

All of us, at one point or another will take on some sort of debt. There are many forms of debt, for example: a mortgage on a home, financing on a vehicle, or credit card debt (consumer debt). With all these different forms it is important to be able to distinguish between what a good form of debt is and a bad form of debt.

We are raised on the belief that all debt is bad. That having to pay any interest at all is a bad thing. The truth is there are good forms and bad forms of debt. Being able to distinguish between the two is a critical component of building our financial intelligence. When we can distinguish between the two, we can attempt to eliminate all of our bad debt in our life and take on as much good debt as we can safely handle. Let’s take a look at some of the differences.

Good Debt
1) Mortgage on a Rental Property – this is a beautiful example of good debt. After making a down payment on your rental property you can use the rent money you collect from the tenants to pay down the mortgage. You won’t make a huge profit as long as the mortgage is being paid off, but once the mortgage is paid off you will have a nice profit and have a huge asset under your name.

2) Student Loan – investing in your education is always a good thing. People who have a university degree or college diploma make on average 10-20% more on their yearly salary than someone who only finished with a high school diploma. Getting a quality education is important since modern careers demand more education.

3) Debt for an Investment Where the Return is Greater than the Interest Accrued – in our example from above where $1000 was borrowed over a year and the interest accrued was $50 (at an annual interest rate of 5%), good debt would be if the loan was invested in anything with a greater than 5% annual rate of return. For example, if you were able to invest the money with a 7% return, you would have $1070 at the end of year. In this case you have made $20 out of nothing!

Bad Debt
1) Consumer/Credit Card Debt – this is the worst kind of debt imaginable. Imagine buying a pair of jeans for $50 and making the minimum payment on your credit card. Interest rates on credit cards vary between 10-20%, which is incredibly high. Making the minimum payment on your card for your jeans will end up costing you something on the order of $200 over 3 years. So the lesson here is to always pay down your credit cards otherwise you’ll be paying an exorbitant amount of interest.

2) Financing for a Vehicle – unless you get 0% financing on a vehicle, any financing on your vehicle is a bad thing. A car losses 15-20% of its value as soon as it’s driven off the lot. Not a good investment at all. If you have to make interest payments on an asset that is constantly losing value, it is not a good investment. In this case you should try to buy a used car and drive it as long as possible (this is how you get the most value out of your vehicle). Check out this archived article about purchasing a used car: http://reynold-savemoney.blogspot.com/2010/06/buy-used-rather-than-new.html. Car dealers love it if you pay for the car all at once, if you can pay for the car in full you can usually negotiate a better deal!

3) Mortgage on Your Own Home – the mortgage on your own home is not necessarily good debt. This is a drastic contrast from a rental property where the mortgage is pretty much paid by the tenants (good debt). In this case the mortgage on your own home is paid by you! You want to pay down your mortage on your own home as quickly as possible. Whereas for a rental property you could amortize (length of the loan) your mortgage over a longer period, as long as your payments are below the monthly rent you receive from your tenants. So in the case of the rental property, it creates cashflow. While owning your own home takes away from your cashflow. This is the reason why Rich Dad (Robert Kiyosaki) believes that your home is not an asset (http://reynold-savemoney.blogspot.com/2010/07/rich-dad-poor-dad-whats-asset.html). So be sure to pay off your mortgage quickly and perhaps rent out your basement to supplement your income and pay off your mortgage faster.

Here's another lesson from our Rich Dad: