On the topic of financing your first home, its important to practice sound financial principals when paying off any large amount of installment debt. One obvious form of installment debt that comes to mind is student loans.
It’s becoming more and more apparent that college graduates are sinking farther into debt. The “Project on Student Debt”, a nonprofit independent research and policy organization dedicated to making college more available and affordable to people of all backgrounds, estimates that 37 million Americans have outstanding Student Loan debt. When you factor in the fact that the average amount of debt for each borrower is somewhere between $24,000 and $28,000, you come to find that the total amount of outstanding student loan debt is about $1 Trillion! This is a staggering number that will undoubtedly continue to grow. It’s also a scary number when you consider we are living in anything but a “stable” economy.
Student Loans can be quite intimidating when you are first starting out on your own. I personally found there to be very limited resources pertaining to how to go about paying back your loans. Lenders offer several different options to help you afford your loan payments. However, one should be weary about doing anything other than paying back using the “standard repayment plan”. At the onset, it might be tempting to defer your loans to the future. But this will lead to a longer repayment period and ultimately more money paid in interest. In this post, I’m going to explain a very simple strategy that will allow you to take control of your student loans, accelerate your repayment, and minimize the amount you pay in interest.
The Avalanche is nothing more than a repayment strategy that stresses the importance of eliminating your high interest loans. The strategy takes advantage of small supplemental (or “snowball”) payments to speed up your repayment process. Here’s how it works:
- Set up your loan accounts to automatically pay the minimum amount each month. Not only is this a good practice to make sure your loans get paid on time, but almost every lender will offer some sort of interest rate reduction for setting up automatic payments. All of my loan accounts reduced their interest rates by 0.25% just for setting up auto pay. You can sleep easy knowing you won’t default on your loans, and you ultimately pay less in interest. If you have not done this yet…do it now!!
- Determine a certain amount of money you can dedicate toward a “snowball” payment each month. The key here is that you allocate something. It does not have to be a huge amount! If you can afford your minimum payments…you can afford to make an snowball payment. Whether its $5, $25, $50, $100….it will benefit you in the long run by accelerating repayment and minimizing interest. Start small and increase if you can.
- Automatically transfer your monthly snowball amount to your highest interest loan. No matter what you hear, it is simple fact that paying off your highest interest loans first will minimize your interest and total repayment time. You get charged interest for every single day you have a loan outstanding (Even weekends!!!). The total amount due to your lender actually increases by the day. At one point in time, I was racking up more than $20.00 per day in interest. That means that just by doing nothing…I was “spending” $20 every day. That is why it is absolutely crucial to eliminate your high interest loans as fast as possible. This will limit your daily interest expense and speed up your repayment.
- Reduce your Minimum Payments -> Increase your Snowball. After you eliminate your highest interest loan, your total monthly minimum payment will decrease. This does not mean you should pay less each month toward your loans! You should continue paying your current snowball + the savings on your lower minimum payment toward your next highest interest account. This means your total monthly contributions to your loans remains the same…but that contribution is more impactful. This has the effect of “increasing” your snowball or additional payment toward your loans. The “Avalanche” effect is what allows you to accelerate your repayment. As you continue to knock out your high interest loans, your snowball increases and your repayment gets faster and faster.
Let’s see how it works!
In the following example, the borrower has 4 different loan accounts all with different minimum payments and interest rates. His total minimum monthly payment is $1,232.52. Based on his income and spending habits, he decides that he can allocate an additional $100.00 per month to his loans. This $100.00 will act as his “initial snowball”. You will see that this snowball will continue to grow and eventually cause an Avalanche that make his loans disappear! In the end, this borrower shaves 1.5 years off his repayment time and saves over $7,000 in total interest!
And that’s all there is to it! Don’t let your debt scare you. Take advantage of the Avalanche, Own Your Loans, and repay your loans faster!
Its been awhile since we’ve provided an update on our project in Allentown. That is basically because we’ve been very busy with the rehab!
Things are going well as we can finally see our vision come to life. The project gets more exciting as time goes on. This is mainly because you start doing more and more finish work as you near the end of the project life cycle. As opposed to working on the “rough structure” or “major systems” of the house, the finish work yields tangible results that you can see and touch. This finish work includes new hardwood floors, kitchen/bathroom tile, countertops, cabinets, fixtures, etc.
I’ll have plenty of pictures up in the coming days. However, before we get to that, I wanted to touch a bit on some things we’ve learned about managing a project budget.
As I’ve stated previously, there are three important factors to consider when managing a budget:
- Do your research and set a firm “Baseline”
- Track “Actuals” and resist the urge to adjust your Baseline budget
- Analyze the variance in your Baseline and use this information to make future budgets more accurate
We’ve learned a great deal about the various costs associated with a major residential rehab. One reason this was a great first project is that the rehab is extremely comprehensive. We have touched just about every aspect of a full rehab that you can imagine (with the exception of the new roof that came with the house!). This includes full exterior makeover, tearing out floors, destroying walls, adding rooms, changing the layout, re-routing plumbing and electric, new appliances, a brand new heating system, etc. The full range of improvements will serve as invaluable experience for future projects. It also allows us to gain insight into the various costs associated with major rehab activities.
With less than 2 weeks to go until the project is completely finished, we are within $200 of our baseline budget! On the surface, this may seem like a phenomenal feat for our first project; however, that would be extremely inaccurate. In realty, we’ve come under budget in several areas totaling a $3,980 surplus. We’ve also gone over budget in several areas totaling an overage of $4,127. This gives us a net variance of -$147. This means we severely under estimated in some areas…and severely over estimated in other areas. We were lucky that this all evened out quite nicely (we also have yet to touch our “Contingency Budget” of $1,700).
The bottom line is that we don’t really care how close we are on the budget. Of course we would like to limit expenses as much as possible. However, we understand that, more than anything else, this first rehab is a learning experience. The goal is to complete this end-to-end rehab, analyze our performance, and use what we’ve learned for future projects. The real work begins when start looking into the reasons why we went over/under budget. We then find ways of making our budget estimates more accurate. We are continuously working to decrease our degree of variance. This will allow us to take on more projects in the future because we will be more confident in our ability to accurately estimate improvement costs.
Below is a snapshot of our current project variance. Here are a few things to keep in mind:
- Total Surplus / Overage is the total of the “Actual” and the “Future”
- The future numbers are costs that haven’t hit our books yet, but we have a firm idea of how far over/under we will be
We’ll provide further updates as we finish up the project over the next couple of weeks. Thanks to everyone who has helped out. Please let us know if you want to come check out the property or if you know someone who might be interested in buying it!
Things are coming along at our Allentown Rehab: 78 Mariner. As the exterior is pretty much finished up, our focus has shifted to interior finish work. Over the next 2 weeks, we plan to make significant progress by adding kitchen cabinets, counterops, and flooring.
One main goal of this initial investment is to use it as a learning opportunity. Although there was a great deal of research that went into our prospecting and planning processes, there is no substitute for real life experience. A key focus of this entire project is to track progress in the most accurate way possible. While it would be great to meet all budget and schedule projections, we realize that it is unlikely on our first rehab. It’s important to track our deviations from plan and determine what could be done to make improvements in the future. To accurately track our progress, I again turn to integrated business systems and tools.
Baseline vs. Actual
When managing any project, it’s important to differentiate your “baseline” from your “actuals”. This takes patience and discipline! It’s very difficult to set a budget or timeline and not change it after other variables are introduced or realized. However, that is the whole point! It makes no sense to set a “baseline” schedule and then change it after you learn that your cabinet delivery will be delayed by a week! That delay is the exact deviation from plan that you want to track. The main point is that you must know what went better than expected and what needs to be improved. Over time, your actual vs. baseline data will help you to improve your planning in the future. This is a common pitfall in project management. PMs always have a desire to change their projections after receiving additional data. Do what ever it takes to avoid this trap. Your interest must be in the long term success of your project or business. The more disciplined you are at baselining and keeping your plan “frozen”, the more accurate your projections will become in the future.
In our case, we really dropped the ball when scheduling and budgeting our tile floors. We made assumptions about our installer’s schedule as well as the price of materials. We later found that we wouldn’t be able to get the installer within the required time frame and that we would have to pay a bunch more for an alternative installer and for materials. When the dust settled on the situation, we ended up spending $750 over our tile budget! Did we go back and adjust our budget? No! You keep the budget “frozen” and track to actuals to see the deviation. We will go over in some areas, under in others, and analyze the data at the end. With each project, we will get more accurate with our budget and schedule estimates.
Leveraging Online Business Apps
NY Home Solutions operates entirely on a “Google Apps” platform. That means that virtually every tool we use for the business is somehow integrated with a web app available on Google Apps. One app that is absolutely crucial to keeping our financial status organized is Wave Accounting. Wave Accounting is an app very similar to Mint.com. It connects with our bank account and allows us to carefully track project expenditures. Not only does this app give us a real time view of our financial status, but it allows us to download data and compare it to our pre-project budget. We are able to see the financial health of the project in real time. We see that we went over budget in one area, but we saved in another. All this data helps us learn for future projects. While our goal is to hit our budgets, we know that it can’t happen. As we continue with subsequent projects, our expectations will continue to increase. We will expect the gap between our “baseline” and our “actuals” to continuously narrow. Wave Accounting is a great free tool that helps us to stay organize and track our performance. There are other apps available that have similar functionality. Freshbooks and Zoho Books are a couple examples. I’m currently sticking with Wave because it’s free. I plan to explore the other options in the future.
I’m very enthusiastic about our use of web-based tools and applications to make our business automated and scalable. I think its absolutely crucial for small businesses to embrace the power of the internet and take advantage of the low cost tools that can help you to grow your business. I recently wrote about what I’m calling “The Software Exodus” on my personal blog. We’ll discuss additional ways to take advantage of business apps in future posts.
In describing the kitchen, I mentioned that we were making renovations to “fit the character of the neighborhood”. Making renovations to “fit in with the neighborhood” is one of the most important aspects of a successful rehab; In the case of NY Home Solutions, it is the driving force behind any and all of our major rehab decisions. While this may seem like a rather obvious factor to consider, many real estate investors tend to ignore it and over or under rehab their properties.
Our eventual buyer will have several expectations about the home before they come for a walk through. Because the house is in Allentown, they will expect the home to have the same eclectic, quirky, and upscale feel of the rest of the neighborhood. That’s why it’s imperative that we make all renovations to keep the house in line with the neighborhood standard. Its very easy to get wrapped up in the renovations and go overboard.
One example of such a decision can be found in the existing 2nd floor bathroom. The house was left with this classic claw foot tub. It needs some patching here and there…but overall its in pretty good shape. Personally, I don’t like the look of this tub and I would never have it in my own home. However, this is the perfect example of an attribute that may fit perfectly into the Allentown neighborhood. What do you think? Should we refinish the tub and keep it in the new bathroom? Or should we make a full scale change and replace it all together?