Much to my own surprise, I seem to have been making something of a living for the past year based on my general thriftiness/ability to handle money well. To the point where I was actually invited to attend the 2011 Financial Bloggers conference in Chicago as a freelance writer specializing in the area of Personal Finance. And truly, I do have some definite skillz in the area of money. I can obsess over bank balances. I can balance a checkbook while simultaneously consuming wine. I can make a mean "debt payoff thermometer " on a dry erase board. And I even spent 20 minutes wandering the aisles of the Hershey chocolate store in downtown Chicago this past Saturday without spending a single cent despite being both ravenous at the time and a chocolate fiend at all times.
However, despite all of these excellent credentials, I have just recently discovered that I can be a complete money dunce.
Let me back up and explain a few things to you about my psychological makeup. (Don't worry, no one has to be lying on a couch).
I do not like debt. I like to know that whatever money I have coming in will be for me to use, rather feeling as though my bank account is merely a conduit to MasterCard or the agency holding my student loan. I am not so anti-debt that I wasn't willing to go to graduate school entirely on student loans back in 2005 which thereby doubled my student loan debt from $16,000 (or thereabouts) to $33,000 (or thereabouts), but I really do try to avoid spending money I don't have on things I want now.
But I am anti-debt enough that I know I make irrational decisions about my money. For example, if I were to get my student loan down to $4,750 someday and I had a grand total of $5,000 to my bank accounts, I would probably pay off the loan and be thrilled to know my remaining $250 was mine alone, ignoring the fact that it would not comfortably pay for anything I need in a month. See, not rational.
But I know that I'm irrational, so I figured it was all good. Knowing one is irrational allows for much better rationalizations. Like the following rationalization I've been making for quite some time:
As of this past spring, I had about $16,500 left on my student loan. The minimum payment for my student loan is $358 per month. From the beginning, I've been sending $400 per month to that bad boy, figuring it would be good to be a month ahead every 9th month. Once my husband had paid off his student loan in May, we decided to send the $200 we budgeted for his post facto education costs to my student loan, in good debt snowball fashion. For those of you keeping score at home, that would mean we'd send $600 a month to my loan and have the beast with many greenbacks killed off sometime in 2013. Woot woot!
Then I wrote a piece on paying your student loan the minimum amount and sending the difference to your retirement fund.
Of course, the research I did made it clear that each borrower should do the math to determine where the money will best be spent. (And by the way, unless you have a terrible loan, your rate will probably be low enough that it doesn't make any sense to pay off the loan early if you have extra money that could be invested. See, I get it for other people).
Unfortunately, despite my research and my incredibly well-honed ability to tell other people what to do, my rationalization lobe was in overdrive. I would invest the full $600 once the loan was dead! Think of the savings in interest by paying it off early! I don't need to do no stinkin' math!!!!
Since this is a post about how I am a dunce, you can probably guess what happened next.
This weekend, I finally opened one of the toys from the Blogger Conference swag bag. The Personal Finance Calculator for Dummies makes it uber simple to determine how much you'll pay in interest, how much you'll earn in compound interest, or how many years it will take you to pay off a loan. It's a very cool tool:
It took only 15 minutes of playing with this calculator (3 of which were spent opening the clamshell packaging and 8 of which were spent looking up my specific interest rate [4.5%] and payoff amount [$13,169] on my student loan) for me to determine the following facts:
1. If I continue to send my loan $600 per month, I will spend approximately $582 in interest over the next 1.9 years.
2. If I send them $360 per month, I will spend approximately $654 in interest over the next 3.2 years
3. If I put $240 per month in a retirement account which earns 6% interest, I will have $10,132 at the end of 3.2 years, $916 of which will be earned interest.
4. I am a complete and total dummy.
Needless to say, once confronted with evidence of my dunce-itude, I immediately called my lender and had them change the payment amount per month to $360. I've got a call in to my friendly neighborhood financial planner to up my retirement savings by $240 per month. And we're all going to forget that this little lapse in rational and intelligent behavior ever happened.