Journal, January 29, 2022

Financial responsibility has been an ever-growing fascination of mine.  The concept of budgeting didn't make sense to me for a long time - as long as I was bringing in money, I didn't want to worry about it.  Once I started tracking all the money coming in and going out, those worries became tangible.  I look back on past me and wonder why I kept my head in the sand, but I acknowledge that past me didn't know any better.  Present me has been on top of my finances for years now, and future me has some lofty financial goals.  This fascination - of knowing what my money is doing - is our topic for today.

Student Loans

I remember my college days - working five jobs, studying a full courseload, and taking out student loans.  Back then, my big financial focus was on bringing in more money.  As long as the checks kept rolling in, I'd be ok.  I wasn't ok, to be fair.  I had no concept of tracking my spending and my litmus test for financial stability was whether I could afford to pay all my bills.  Looking back, the financial mindset I had then is surprisingly commonplace - I was, by definition, living paycheck to paycheck.  I wasn't saving money, and my money wasn't working for me.  I was working to make ends meet.

As my college days continued, the ever-present threat of my student loans grew larger and more terrifying.  That very large number kept growing, and for all my efforts to throw what I could afford at it, it grew larger still.  At the time, this just didn't make sense - if I'm paying the debt, it should decrease, not increase.  If it's increasing, even though I'm paying it, there's something wrong.  This sent me down a rabbit hole of research, mathematical formulas, and working with my student loan servicer to make sure that I understood the math correctly.  I'll provide a simple example here and then work through integrating that example with a total picture of all loans.

Calculating Interest

Say you've got a loan for $5,000 at 6.8%.  Your student loan servicer puts you on a payment plan assuming a ten-year payoff (120 months).  Your monthly payment for this loan is $57.54.  Not too bad, right?  Wrong.

Value Description Excel Formula
$5,000 Principal [P]
6.8% Interest rate [i]
$0.93 Daily interest [d] =(P*I)/365.25
$28.86 Monthly interest [m] =d*31
120 Loan term (months) [n]
$57.54 Monthly payment [Pmt] =-PMT(i/12,n,P)
$28.68 Payment to principal =Pmt-m
$1,866.26 Loan interest paid =-CUMIPMT(i/12,n,P,1,n,1)



Using the above math, your $5,000 loan ends up costing $6,866.26.  Here's the thing, though: student loan interest accrues daily.  What this means is on the end of day 1, your $5,000 loan is a $5,000.93 loan.  At the end of the month, your $5,000 loan is a $5,028.86 loan.  You pay your $57.54, knocking your balance down to $4,971.32  Here's a quick amortization chart for the first six months of payments:

Principal Rate Daily Monthly To principal Payment
$5,000 6.8% $0.93 $28.86 $28.68 $57.54
$4,971.32 6.8% $0.93 $28.69 $28.85 $57.54
$4,942.47 6.8% $0.92 $28.52 $29.02 $57.54
$4,913.45 6.8% $0.91 $28.36 $29.18 $57.54
$4,884.27 6.8% $0.91 $28.19 $29.35 $57.54
$4,854.92 6.8% $0.90 $28.02 $29.52 $57.54


You'll note that over time the accrued interest decreases and the payment to principal increases, but it's a slow process.  Ideally you're paying down the principal, rather than paying interest to the loan servicer.  They're assuming a ten year repayment, but with diligence you'll pay them down much faster.

Calculating Extra Payments

The challenge is in tracking and calculating these numbers across multiple loans.  Towards the end of my college career I set up a spreadsheet to track all of my loans using these same formulas across each of their principal balances and interest rates.  I additionally calculated out how many months left I have at my current payment rate, and the monthly payment for each loan I'd have to make to pay them off in three years.  Finally, I calculated out a rank for each loan to prioritize which loans would get the most impact from extra payments.  Here's an example, including the Excel formulas to calculate everything:

Principal [P] Rate [i] Daily [d] Monthly [m] To principal Payment [Pmt] Remaining [n] Interest paid 3 years?
$5,000 6.8% $0.93 $28.86 $28.68 $57.54 120.0 $1,865.91 $153.93
    =(P*I)/365.25 =d*31 =Pmt-m =-PMT(i/12,n,P) =-NPER(i/12,Pmt,P) =-CUMIPMT(i/12,n,P,1,n,1) =PMT(i/12,36,P)


Each time I make a payment I update the Principal value for each loan - the value of the loan on the day of the payment minus the payment amount.  The rest of the sheet calculates everything else automatically.  Using these calculations across each loan allows me to track the total value of all loans, the total interest paid, the expected interest paid, where to prioritize extra payments, and the remaining number of payments until each loan is paid off.


Once the big, scary student loan monster had been reduced to simple math, the next priority for me was creating a budget.  I knew that I wanted to pay off my loans faster than ten years, and I wanted to minimize the total amount of interest paid.  In order to afford extra payments, I needed to know where my money was going.  I wanted to save money, and the formula for that is simple: spend less money than you earn.  Seems easy enough, right?  Well...

It turns out a lot of people don't really keep tabs on where their money goes.  Looking back, it seems pretty reckless - that paycheck-to-paycheck mentality allowed me to survive, but it didn't help me thrive.  I wanted to put an end to that and do things right.  Creating a budget requires knowing where your money is going.  For me, that meant tracking every penny I spent and every penny I received.  My budget started on a sticky note, one sticky note per month.


Tracking income can be challenging.  If you're working an hourly job or receive tips, the monthly income you receive can be wildly variable.  The important thing is to keep track of it.  Even if you don't have a consistent paycheck, being able to estimate your monthly income will make budgeting a lot easier.  When I started budgeting I was working a minimum wage hourly job with tips.  Every paycheck and each day's tips were added to the income line on my sticky note.  At the end of the month I'd total up each line and sum both categories to count my total monthly income.

Budget (Month, Year)
Income: Paychecks $600+$550
Income: Tips $30+20+12+14+35 ...

Tracking expenses (your spending) is crucial.  Not only should you know every dollar that was spent, but also which category of things you spent it in.  At first, I had to look at my spending for a month to figure out rough categories.  As time went on, my spending categories switched around a bit until I figured out the right mix for me.  Initially, my categories were fairly simple: rent, utilities, debts (student loans), travel, food, and discretionary.  Just like the income, each time I spent money I would add the amount that I spent to the appropriate category.  At the end of the month, I would add up each of the numbers in each category to get a total of each category and a total spend for my expenses.

Category Spend Description
Rent $500 Monthly rent
Utilities $20+50+70 Gas/electric, water/sewage/trash, internet, cellphone
Debts $57.54 Student loans
Travel $30+50 Gas, car insurance, repairs
Food $76.54+21+148.60+13.18+21 Groceries, eating out
Discretionary $35+18.64+90 Allowance: clothes, haircuts, toys


Using the above sticky note budget across a handful of months, I was able to estimate my monthly income and expenses across each category.  Using those estimates as a guideline, I was able to make room for extra payments on the student loans as well as set aside money for savings.  It took a few months of diligently tracking everything, but the habit was worth the hassle.  With time and experience, the goal with budgeting is to allocate a set number of dollars to each category of spending, and to have every dollar of your income accounted for.  Those budget categories can be exact (I know what my rent costs) or rough numbers (I want to spend no more than $350 on groceries).  Here's a simplified example.

Category Budget Spend Description
Income $1,800 $1,914.54 Paychecks + Tips
Rent $500 $500  
Utilities $140 $20+50+70 Gas/electric, W/S/T, internet, phone
Debts $60 $57.54 Student loans
Travel $100 $30+50 Gas, car insurance, repairs
Groceries $350 $76.54+148.60  
Eating out $50 $21+13.18+21  
Discretionary $150 $35+18.64+90 Allowance: clothes, haircuts, toys
Savings $450 $716.04 What's left at the end of the month


With the chart above, each budget category has an allocated amount.  I knew from experience that I'd bring in an average amount of money every month, and I could use that to allocate my spending across the rest of my budget.  For each expense category, I had estimated what I expected (or wanted) to spend.  The leftover money I allocated to savings.  Then, at the end of the month, I totaled up my income and subtracted each expense from it.  What was left was my savings - they money that I could set aside to build up my emergency fund.


As I mentioned above, the fomula for savings is simple: spend less than you earn.  Armed with my sticky note budget, I was able to monitor my spending in various categories and adjust my habits to spend less when needed.  For example, as time went on I split the food category into two: groceries and eating out.  This allowed me to see that I had been spending more money than I'd like eating out, and to put my focus on groceries.  With that attention to reduced spending, I'd end up with money left over at the end of the month.  This money got transferred to savings.

Having money in savings is great, but knowing why you're doing it is even better.  I think of savings goals in a few different tiers.  The first step is to build up an emergency fund.

Emergency Fund

An emergency fund is the first step towards financial responsibility.  If you don't want to live paycheck to paycheck, you have to have enough money in savings to cover an emergency.  To start, save up $1,000.  Then, save up a month's worth of expenses.  Once you're a month ahead, you're not living paycheck to paycheck.  Then, save up 3-6 months of expenses to cover you in case of an emergency like a job loss or other catestrophic event.  This part is really challenging!  What I found was the first $5,000 was the hardest.  Once I'd save up a decent amount, some event would happen that wiped out a good portion of the emergency fund.  I wanted to be frustrated, as I'd worked hard to save up for it.  In reality, the emergency fund was working exactly how it's supposed to - it's money that you have available in case of emergencies.  For example, I had to get new tires and brakes on my car, to the tune of $800.  At the time, that was a significant amount of money, but I had it available in my emergency fund to make it work.  

Baby Steps

Over the years my financial situation has gotten increasingly more complex, and my long-term goals have become more and more attainable.  The reason these things are managable is because I took a good, long look at what my money was doing.  It wasn't easy (even today there's struggles) but it's been worthwhile.  I suppose the takeaway here is that I've been fascinated with knowing what my money is doing, and I wanted to share that in the hopes that it helps somebody else.  I remember in my younger days wondering why nobody taught financial responsibility.  As I get older I realize that part of being an adult is taking responsibility for myself, and that means having difficult conversations, asking for help, and taking all the advice I can get.  I hope this information is useful to you, and thanks for reading!