Author Topic: Case study: on the right track?  (Read 1342 times)

sceebs

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Case study: on the right track?
« on: July 10, 2017, 11:07:21 AM »
I’m 27 years old, living in Portland, Oregon, filing single, with no human dependents (just a dog). I have some loan debt, but I'm not at all underwater. My main problem is that I'm not saving as much as I would like, or rather, I'm not making the best use of the money I do have available. And that's not a bad problem to have, relatively speaking.

Gross Salary:
 - Annual: $96,000
 - Monthly: $8,000

Pre-tax deductions (per month):
 - 401k: $480 (getting 50% match)
 - HSA: $200 (just dropped from $400/month to not over-contribute, but still won’t quite max)
 - Medical: $100
 - Dental/Vision: $20
Total: $800

Taxes: (per month):
 - Federal: $1178
 - Medicare: $108
 - Social Security: $464
 - State: $512
Total: $2,262

Monthly take-home: $4,938

Normal living expenses:
 - Rent: $1,275
 - Utilities: ~$45
 - Internet: $65
 - Phone: ~$35
 - Dog food: ~$25 (actually about $40 every other month)
 - Dog wellness plan: $43 (I won’t be renewing next year)
 - Gym: $12 (thanks to $65 employer reimbursement)
 - Groceries: ~$225
 - Car insurance: $91
 - Gas: ~$50
 - Renter’s insurance: $17
 - Haircut: $25
 - Misc/household: ~$100 (includes things like expensive apartment laundry machines, a recent trip to Fedex, etc.)
 - “Work food” (basically coffee, the odd lunch, etc.): $115
 - “Just for fun”: $200 (dinners/outings with girlfriend mostly)
 - Subscriptions (Spotify, etc.): $24
Total: $2347 (approximately)

Monthly minimum debt expenses (details below): $451

Monthly surplus: $2,140

Assets:
 - 401k: $16,247
 - Acorns: $17 (laughable, but it seemed harmless enough to sign up)
 - Cash (Barclays/BofA checking): $5,609
 - HSA: $795 (turns out I’ll have a monthly $5 fee until it reaches $5,500 or so)
Total: $22,668

Liabilities:
 - Student loan #1: $6,892 @ 6.55%
 - Student loan #2: $7,094 @ 3.61%
    - Not sure on individual minimums, but collective is $230
 - Car: $12,248 | Min: $221 (just refinanced to reduce from $380/month)
 - IRS: $3671 (surprise new addition—no monthly payment, at least not yet)
Total: $29,905

Net worth: -$7,237

This is looking at spending for a typical month, not including a few larger one-off/emergency purchases I’ve made recently, which will thankfully stop going forward. I know there are a couple of obvious places to trim fat already (Sup, car payment?). “Work food”, for example, is due to me working remotely and wanting to get out of my apartment so I don’t go crazy, so I usually end up in a cafe. It should be easy enough to go somewhere I can bring my own coffee and pack a lunch instead, as long as there's wifi. “Just for fun”, as it says, right now is mostly for outings with my girlfriend, but she’s soon going to be moving out-of-state, so that will likely be trimmed back a bit automatically. We’re still staying together, but coincidentally she’s going to school in the city where my company is based, so I’ll have quarterly flights paid for, and I can extend my stays however it makes sense—so it might average out to roughly the same expense. And yeah, of course stuff like subscriptions can be tossed out at any time. I’m also warming up to the idea of getting a place with a roommate once my current lease is up next March, especially if my brother who’s likely moving to the area is open to it.

The IRS debt just came as a surprise this past week, because I somehow missed that self-employment tax wasn’t accounted for when I filed last year (now thankfully w-2). It’s a real bummer because I feel like I was just starting to pick up steam on my debt repayment/savings allocations, but now I need to account for that. My current plan for doing so:
 1. Pay IRS debt immediately with cash (action required by August 2nd, no matter what)
 2. Pay minimum on other debts (currently allocating $660 extra toward student loans, paid ahead until May 2018)
 3. Build up proper emergency fund by pouring monthly surplus into Barclays savings until it reaches ~$10,000
 4. Return to aggressive debt repayment, still allocating ~$1000/month to savings

As far as a longer-term plan goes: I definitely want to retire ASAP. It looks like with current spending/saving habits I can conservatively expect no more than 10-15 years until then. I don’t quite know what to plan for when it comes to ER spending (I feel like I'd be getting ahead of myself at the moment), but it’s currently hard to imagine my expenses increasing that much, unless of course I have kids (and in that case, I hope to still keep the increase to a minimum by having solid habits ingrained by then).

I can expect fairly consistent raises at my current job (somewhere in the area of 3-5%/year). I’m also not accounting for it or banking on it at all, but my company just switched to a quarterly profit sharing model, which should be paid out for the first time in October, assuming there’s anything to pay out. Best case scenario, that will put anywhere from a few hundred to a couple thousand in my pocket per quarter (minus taxes), which I plan to immediately dump into debts.

For the time being, I still find myself questioning how best to allocate the monthly "surplus", so most of the time a big chunk of it ends up sitting in my checking account (available to pay off credit card that’s used for everything). I’m definitely debt averse, and really want to get to rid of what I currently owe, but at the same time, I also want to plan for travel, and I want to buy a house eventually (also hoping for a rental property or two), or I think about buying index funds, or even just contributing more to my 401k. I know I want to build up my emergency fund first, but what’s the best plan of action after that?

Thanks everyone!
« Last Edit: July 10, 2017, 12:50:17 PM by sceebs »

Lady SA

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Re: Case study: on the right track?
« Reply #1 on: July 10, 2017, 11:47:07 AM »
have you looked into refinancing student loan #1? with your salary I'm sure you could refinance for a lower rate. 6.55% is kind of high.
Also, with your salary, you should be maxing our your 401k, which means $692 each biweekly paycheck. you're only putting in $480 so you aren't close to maxing your 401k. The $18k limit only applies to your contributions, it does not include any employer matches.

As for how to allocate your surplus, see investment order:
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.         
« Last Edit: July 10, 2017, 11:49:56 AM by Lady Smartass »
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

Fire2025

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Re: Case study: on the right track?
« Reply #2 on: July 10, 2017, 12:26:03 PM »
Is this your "hopeful" budget?  Or your "real" budget?  Are you tracking your expenses?  I ask because things are not really adding up for me

You are "spending" $2798 and bringing home $4938, that's a surplus of $2140 a month, but you aren't maxing your 401k and you don't have the kind of savings that I would expect with this level of surplus.  Are you actually spending $2000/month on unknown/ unlisted things or have you only been working 3 months or so?

I agree with Lady Smartass, first things first, up your 401k contribution and save yourself some money for FI and on your tax bill next year.

Then I would save for a couple of months and just pay that tax bill asap, but that's just me.

Then look at your student loans and see if you can rain in those interest rates, while rates are still lowish.

I'm going to wait to comment on the budget until I know if this is real information, or if you have only been in the workforce for a couple of months.


sceebs

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Re: Case study: on the right track?
« Reply #3 on: July 10, 2017, 12:57:59 PM »
@LadySmartass: I'd looked into consolidating both student loans, but decided against it because even at ~5% I'd end up paying more on the 3.6% one than I would as-is. But I hadn't thought about just refinancing the higher one, so I'll be doing that! I can get it down to 5.25% through SoFi, and I just called and checked that my minimum payment for the one remaining loan could be reduced accordingly. So I should have far less than $200/month in student loan minimums. Thanks for the idea!

@Fire2025: That skepticism is totally fair. I've been at my current job for about a year and a half. For most of that time, I've been paying down my loans pretty heavily, and I also moved from out of state last March, into my first solo apartment, so I had a number of heavy upfront costs related to that. Then there was a series of sporadic larger expenses, which, like I mentioned, will luckily be stopping. I also just got a $10k raise a couple months ago, which accounts for a good chunk of the surplus, because I haven't decided what to do with it (besides slightly increasing my 401k for the new match and throwing more at student loans—I just got rid of another 6.8% one). There was a little splurging, but nothing like lasting lifestyle creep. I just started the HSA around the same time as the raise and reduced my 401k contribution to account for that. TL;DR: Yes, it's accurate, but not down-to-the-penny accurate. This is more of my "going forward" budget, so you could say it's hopeful, but I guarantee it's also realistic.

All that said, I definitely agree with you both that I can be allocating much more to retirement accounts, especially going forward with the reduced student loan rate.
« Last Edit: July 10, 2017, 01:03:49 PM by sceebs »

DarkandStormy

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Re: Case study: on the right track?
« Reply #4 on: July 10, 2017, 01:01:47 PM »
Not too much to add...nothing outrageous in spending -> if you combine renters & auto insurance could you shop around and get it cheaper? Probably.  If you're living alone do you need $65/month internet?  Probably not.  Depending on where you live, it's probably available for less than $40/month for 10-15 Mbps which is all you need.  Could you cut out a subscription or two? Sure.  All of that, plus maybe less "work food" might free you up north of $1K/year.

As others have said, could you look into refinancing your higher interest rate loan?  That interest will add up quickly.  But yeah, first I'd deal with the IRS issue.  If you aren't comfortable with your emergency fund, you could build that up to cover enough for a couple months worth of expenses and then attack the remainder of your student loan debt.

If you don't want to max out your 401k completely, consider a Roth IRA (or Traditional IRA).  For a Roth, you have until April 15, 2018 to contribute for the 2017 tax year (yes you can file after you've filed your 1040).  This is standard every year.

Just keep in mind, as you discussed long term goals, if you have any interest in buying a house, you mentioned kids potentially, etc. that may alter your FI number down the line.  Nothing to worry about now, but if you do want to buy a house then you'll need to start thinking about the down payment when the time comes.
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DarkandStormy

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Re: Case study: on the right track?
« Reply #5 on: July 10, 2017, 01:07:01 PM »
Just to add on - http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

If FIRE is your goal in 10-15 years, you'll need to start saving 50+% of your post-tax income.  So if we can round up post-tax income to $5000/month, nearly $2,500 of that should be going to your nest egg - be it 401(k), IRAs, HSA investments, or taxable investments.  Once you clear debt and stick to the budget, you're pretty much there and on track for your 10-15 year goal.  This is, of course, absent anything like a house purchase or children entering the equation that might delay your FIRE date.
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Laura33

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Re: Case study: on the right track?
« Reply #6 on: July 10, 2017, 01:27:32 PM »
My main comment:  do not assume that those occasional, one-off expenses will stop.  Life happens.  Shit happens.  What happens when your dog gets hit by a car and needs a doggie ER?  What happens when your mom or dad gets sick and you need (want) to fly home?  Or your couch breaks, or your dog chews everything and you lose your pet deposit, or or or or or. . . .   I've been doing this a lot longer than you, so trust me when I say that unplanned things will continue to happen -- they'll just be different unplanned things (duh, because otherwise, you could plan for them).  So save a little room in your budget for that sort of stuff, so you don't always feel like each new thing sets you back or throws you off-track.

Otherwise:  max out your 401(k), stat.  Throw everything else at the higher-interest loan.  Once you get your EF where you are comfortable, start an IRA or a Roth; if you still have money left over to invest, start a post-tax investment account.

And then relax, be patient, and let the power of compounding do its work.  Right now, that power is largely working against you, as the difference in interest rates means that your debt grows more each month than your savings does.  And that makes it feel hard and like a big long slog to dig out of the hole.  But as you use your income to pay down the debts and invest more in the stock market, that will switch, and compounding will begin to work in your favor.  It just takes time and patience.  You are in a good position and on the right track.
Laugh while you can, monkey-boy

sceebs

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Re: Case study: on the right track?
« Reply #7 on: July 10, 2017, 01:57:46 PM »
@DarkandStormy: I already had both renter's and auto through Progressive, but I called to see if there was anything else I could do to reduce my rate, and that was a great decision. Turns out JUST by updating my employment industry from a generic "Other: Software Engineer", to their official: "IT: Computer Programmer", I'll be saving about $17/month. On top of that, I qualified for an updated policy that'll save me a couple more dollars a month, so now:

Car insurance: $91 $71 (with potential for further decrease when I start over with the Snapshot program—I hardly drive during the week, so I'd be amazed if it didn't drop more)

Also, totally agreed regarding internet. It just recently went up from $40 once the new customer baiting rate expired. I'll give them a call too and have it switched.

@Laura33: Thanks, and I hear ya, 100%. That's partially why I wanted to boost my liquid savings more before really diving into retirement and debt repayment. So while I'm not explicitly budgeting for expenses like that, I'm very much aware that they happen, and I want to be more prepared for it, but not to the point of total paranoia. The truth is I didn't panic when I saw that IRS notice, because I know I can pay it, and I'm super grateful to be in that position—it's just a bummer that my savings will take temporary hit. But pretty soon that negative net balance will hit 0 and I'll be on my way.

Fire2025

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Re: Case study: on the right track?
« Reply #8 on: July 10, 2017, 02:09:26 PM »
Just to add on - http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

If FIRE is your goal in 10-15 years, you'll need to start saving 50+% of your post-tax income.  So if we can round up post-tax income to $5000/month, nearly $2,500 of that should be going to your nest egg - be it 401(k), IRAs, HSA investments, or taxable investments.  Once you clear debt and stick to the budget, you're pretty much there and on track for your 10-15 year goal.  This is, of course, absent anything like a house purchase or children entering the equation that might delay your FIRE date.

You say this is the primary goal and you say that budget is real so, I'd suggest you really go through your budget and ask; "would I rather drink coffee at work ($14000 over the next 10 years to FIRE/ without ROI) or FIRE?"

Same for groceries, misc/household, and that car payment.  You've already talked about the SL and rent.

Look for the things that you don't want more than your freedom and eliminate them from the budget. 

Good luck!!! You're doing great and are set up to really kill this.


Lady SA

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Re: Case study: on the right track?
« Reply #9 on: July 10, 2017, 02:23:14 PM »
@LadySmartass: I'd looked into consolidating both student loans, but decided against it because even at ~5% I'd end up paying more on the 3.6% one than I would as-is. But I hadn't thought about just refinancing the higher one, so I'll be doing that! I can get it down to 5.25% through SoFi, and I just called and checked that my minimum payment for the one remaining loan could be reduced accordingly. So I should have far less than $200/month in student loan minimums. Thanks for the idea!

All that said, I definitely agree with you both that I can be allocating much more to retirement accounts, especially going forward with the reduced student loan rate.

AWESOME!!
Be sure to check with some other student loan refinancers, you can shop around for a good rate. I checked with sofi, but turns out Earnest offered me an even lower rate so I went with them.

Shameless plug, you can use the referral link in my sig and get a bonus is you refinance with them, but regardless I would encourage you to shop around. Dropping 1%+ on your rate is AWESOME, but see if theres any more you can squeeze out there :) Maybe sofi will turn out to be the best offer after all, but then you'll be satisfied that you optimized it the best you could!
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

sceebs

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Re: Case study: on the right track?
« Reply #10 on: July 10, 2017, 02:29:45 PM »
I'm really glad I decided to post this. Just from the responses I've gotten so far I've been able to make some changes that I hadn't planned on making:

Immediate expense changes:
 - Car insurance: $91 -> $71 (with potential for further decrease in 6 months)
 - Internet: $64 -> $40 (Got the same "promotional deal" I had for next 12 months, because actually downgrading would've cost $50/month. I'll check back periodically to see if I can get a lower tier for cheaper.)

Loan adjustments:
 - Student Loan #1: 6.55% -> 5.25% 5.01% (not finalized, but moving forward; will result in ~$40-50/month less)

Pre-tax deductions:
 - HSA: $200 -> $260 (I should just about max out)

Going to tinker some more with 401k numbers, but I'll likely increase that some time soon, as well as get rid of the IRS debt with cash.
« Last Edit: July 10, 2017, 03:03:58 PM by sceebs »

Another Reader

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Re: Case study: on the right track?
« Reply #11 on: July 10, 2017, 02:39:03 PM »
"currently allocating $660 extra toward student loans, paid ahead until May 2018"

You are being cheated by the student loan servicer.  Instead of applying your extra payments to the loan principal, they are crediting future payments.  You are not reducing principal or saving interest this way.

sceebs

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Re: Case study: on the right track?
« Reply #12 on: July 10, 2017, 03:00:30 PM »
"currently allocating $660 extra toward student loans, paid ahead until May 2018"

You are being cheated by the student loan servicer.  Instead of applying your extra payments to the loan principal, they are crediting future payments.  You are not reducing principal or saving interest this way.

Wouldn't this only be an issue if I allowed myself to stop making payments until then? My servicer also allows for custom allocations on excess payments, so I've been applying all excess to the highest % rate (I just killed another 6.8% loan last week).

sceebs

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Re: Case study: on the right track?
« Reply #13 on: July 10, 2017, 03:03:25 PM »
AWESOME!!
Be sure to check with some other student loan refinancers, you can shop around for a good rate. I checked with sofi, but turns out Earnest offered me an even lower rate so I went with them.

Shameless plug, you can use the referral link in my sig and get a bonus is you refinance with them, but regardless I would encourage you to shop around. Dropping 1%+ on your rate is AWESOME, but see if theres any more you can squeeze out there :) Maybe sofi will turn out to be the best offer after all, but then you'll be satisfied that you optimized it the best you could!

THANK YOU AGAIN. Turns out I can get 5.01% fixed with Earnest (applied through your referral link too, btw).

Laura33

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Re: Case study: on the right track?
« Reply #14 on: July 10, 2017, 03:54:49 PM »
"currently allocating $660 extra toward student loans, paid ahead until May 2018"

You are being cheated by the student loan servicer.  Instead of applying your extra payments to the loan principal, they are crediting future payments.  You are not reducing principal or saving interest this way.

Wouldn't this only be an issue if I allowed myself to stop making payments until then? My servicer also allows for custom allocations on excess payments, so I've been applying all excess to the highest % rate (I just killed another 6.8% loan last week).

No, because this allows them to continue to charge interest on the entire outstanding balance!!  You are basically giving them an interest-free loan of YOUR money until they credit it to your account, while they can continue to charge you as if you are still holding the money!!  Always ALWAYS ALWAYS instruct them to apply any overpayments to the principal of the highest-interest loan!

Otherwise, big congrats -- lots of progress in a very short time!  And do remember that increasing the 401(k) contributions will also reduce your taxes, so you won't feel the pinch nearly as much as you think you will. 
Laugh while you can, monkey-boy

sceebs

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Re: Case study: on the right track?
« Reply #15 on: July 10, 2017, 04:30:04 PM »
"currently allocating $660 extra toward student loans, paid ahead until May 2018"

You are being cheated by the student loan servicer.  Instead of applying your extra payments to the loan principal, they are crediting future payments.  You are not reducing principal or saving interest this way.

Wouldn't this only be an issue if I allowed myself to stop making payments until then? My servicer also allows for custom allocations on excess payments, so I've been applying all excess to the highest % rate (I just killed another 6.8% loan last week).

No, because this allows them to continue to charge interest on the entire outstanding balance!!  You are basically giving them an interest-free loan of YOUR money until they credit it to your account, while they can continue to charge you as if you are still holding the money!!  Always ALWAYS ALWAYS instruct them to apply any overpayments to the principal of the highest-interest loan!

Otherwise, big congrats -- lots of progress in a very short time!  And do remember that increasing the 401(k) contributions will also reduce your taxes, so you won't feel the pinch nearly as much as you think you will.

I'm pretty sure I'm in the clear in this case. I've made excess payments many times over the past couple years, and I've seen my principal go down as intended with each one. Even before they added the feature for adjusting the allocations online myself, I would always call and have them apply the excess to the highest-interest loan. I just called again right now to verify all this. "Paid ahead" status in this case is essentially a "courtesy" (more like a manipulation tactic) that says, "Your account balance looks like what it would in x (May 2018), if you had just been paying the minimum." The implication is, "You can stop making payments until x, but interest will continue to accrue no matter what." So as long as I don't fall for that, I'm good.

Lady SA

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Re: Case study: on the right track?
« Reply #16 on: July 10, 2017, 04:51:56 PM »
AWESOME!!
Be sure to check with some other student loan refinancers, you can shop around for a good rate. I checked with sofi, but turns out Earnest offered me an even lower rate so I went with them.

Shameless plug, you can use the referral link in my sig and get a bonus is you refinance with them, but regardless I would encourage you to shop around. Dropping 1%+ on your rate is AWESOME, but see if theres any more you can squeeze out there :) Maybe sofi will turn out to be the best offer after all, but then you'll be satisfied that you optimized it the best you could!

THANK YOU AGAIN. Turns out I can get 5.01% fixed with Earnest (applied through your referral link too, btw).

Lookit that, you dropped your rate over 1.5% in less than a day!! NICE!!! Congrats! I have been very happy with Earnest and I hope you will be too :)
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!

Fire2025

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Re: Case study: on the right track?
« Reply #17 on: July 10, 2017, 06:50:54 PM »
Sceebs, Wow you are killing it.  Congratulations!!!!!!!!!!!!!!!!!!!!!!!!!!

theotherelise

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Re: Case study: on the right track?
« Reply #18 on: July 11, 2017, 07:08:57 AM »
"currently allocating $660 extra toward student loans, paid ahead until May 2018"

You are being cheated by the student loan servicer.  Instead of applying your extra payments to the loan principal, they are crediting future payments.  You are not reducing principal or saving interest this way.

Wouldn't this only be an issue if I allowed myself to stop making payments until then? My servicer also allows for custom allocations on excess payments, so I've been applying all excess to the highest % rate (I just killed another 6.8% loan last week).

No, because this allows them to continue to charge interest on the entire outstanding balance!!  You are basically giving them an interest-free loan of YOUR money until they credit it to your account, while they can continue to charge you as if you are still holding the money!!  Always ALWAYS ALWAYS instruct them to apply any overpayments to the principal of the highest-interest loan!

Otherwise, big congrats -- lots of progress in a very short time!  And do remember that increasing the 401(k) contributions will also reduce your taxes, so you won't feel the pinch nearly as much as you think you will.

I'm pretty sure I'm in the clear in this case. I've made excess payments many times over the past couple years, and I've seen my principal go down as intended with each one. Even before they added the feature for adjusting the allocations online myself, I would always call and have them apply the excess to the highest-interest loan. I just called again right now to verify all this. "Paid ahead" status in this case is essentially a "courtesy" (more like a manipulation tactic) that says, "Your account balance looks like what it would in x (May 2018), if you had just been paying the minimum." The implication is, "You can stop making payments until x, but interest will continue to accrue no matter what." So as long as I don't fall for that, I'm good.

Yes, that is correct, you are fine. We paid off 55k in federal student loans this way and the principle and interest charged absolutely went down even while they continued to change the "next payment due" date as if we were just pre-paying. I actually really liked that in the end because of the worst-case-scenarios. If we both lost jobs and needed to immediately scale back, we could have foregone that $800 minimum payment until back on our feet. Thankfully we were able to just pay it off. But yes, absolutely they are not just holding onto the payment in arrears.

sceebs

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Re: Case study: on the right track?
« Reply #19 on: July 12, 2017, 07:25:14 PM »
Finalized my loan refinance today! Ended up with 5.07% instead of 5.01, but I can't complain—1.5% decrease, and the minimum payment is $75. That combined with a lowered minimum on the other loan (TBD) has me excited to put those extra dollars to more fruitful use.

Lady SA

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Re: Case study: on the right track?
« Reply #20 on: July 13, 2017, 08:24:09 AM »
Alright!! That's so awesome, sceebs! Onward and upward, isn't it a great feeling!?
https://www.earnest.com/invite/lillian2 --> Use this referral to refinance your student loans with Earnest and get a $200 bonus!