Wednesday, April 1, 2009

Student debt

My student debt at the end of graduation was at around $28 000. My student loan was costing me interest of prime (5% at the time) plus 2.5%. Monthly interest payments were costing me $175 a month. In order to save on money I got a line of credit and payed the student loan in full. The best the bank could give me at the time was prime plus 1%. This resulted in a savings of $35 a month in interest charges.

However, I got to thinking how can I save even more on interest payments. This is when I came up with the plan to hold nothing in savings. My savings account did not actually consist of savings. It was were I temporarily held my pay cheques until I had to pay my bills. Earlier I decided I would buy everything I needed with my credit card. This way I would gain visa points but also get a period of time where I could collect interest in my savings account until my credit card payment was due. In order for this to be effective one must pay off the credit card in full every month. If one fails to pay the balance in full the interest rate charged from the credit company makes it not worth it.

By buying everything on my credit card I was able to hold onto my money in my savings account for an extra month and gain 3% interest. However, I realized that instead of putting this money in my savings if I was to store it as a payment in my line of credit I would be saving 6% in interest payments. This resulted in me saving even more money.

Let me provide an example. Say I spent $3000 a month on my credit card. If I stored it in my savings account until the bill came due I would have made $7.50 a month. However, storing the money in my line of credit would save me $15 a month in interest payments. Not only that I do not have to claim the savings as income like I would have to if I made the interest in my savings account. To ensure I never missed a payment, I postdated my line of credit to pay my credit card balance in full on the day that the payment was due as soon as I got my monthly statement.

So between these two methods 1 getting a line of credit with a lower interest rate then my student loans, and 2 buying everything with a credit card and storing all my income on my line of credit, I saved a total of $50 a month. Think $50 a month x 12 was $600 extra in savings. $600 a year equls 2 less days of work to focus on things outside of the formal economy.

This was the start of me looking at other expenses and finding little ways to chip away at them. If I could save $600 a year without it effecting me I wondered what other areas I could cut back and save. These small saving add up over the year and can result in thousands saved or hours of work. I will blog about some of the other areas I was able to cut back.