In 1969 Elizabeth Kubler-Ross presented the five stages of grief in her book On Death and Dying: denial, anger, bargaining, depression, and acceptance. If you have a large student insurance balance, you may have gone through some “grief” and are no stranger to the five stages. If you are in the “acceptance” stage then this article is for you!
Being in the acceptance phase is a good place to be. This means that: You’ve discovered that postponement and forgiveness are not forever (the denial stage), you’ve stopped blaming others for what you assumed was a “free ride” (the anger stage), you’ve learned that you can’t forgive yourself. The insurance through bankruptcy (the bargaining stage), you stopped drinking heavily and watched the Gilmore Girls reboot (the depression stage), and you now accept your financial responsibility and are ready to do something about it. You won’t find any “magic bullets” in this article, but you will find an effective strategy to pay off your insurance in the shortest period of time.
Step 1 – Organize the insurance in a spreadsheet
To better manage your student insurance, you must fully understand what you are facing. Creating a spreadsheet gives you insight into how your insurance is doing and shows you the positive results of making additional principal payments. To create a functional spreadsheet, you must understand the terms of your insurance and know how to organize this information into a spreadsheet. If you’re not a spreadsheet user, you’ll find learning the basics easy.
To start creating your spreadsheet, you’ll need the following information about your insurance: the current balance, the interest rate, the repayment amount, and how the interest is calculated. This will allow you to create an interactive spreadsheet that calculates the amount of interest you accrue daily and provides you with a daily balance.
How interest is calculated may require some digging. You’ll find this information by reviewing insurance documents, going to the lender’s website, or calling the lender’s customer service number. The number of days used to calculate the interest on the insurance is known as the base. For example, a mortgage is usually calculated using “30/360”, which means that a year is assumed to have 360 days and a month is assumed to have 30 days. Thus, when you make a mortgage payment, the interest will be based on 30 days. Student insurances typically use the actual number of days in a month and a year as 365 days (actual/365). Some insurances may use the actual / 365.25 convention; Every insurance is different. For an actual/365 insurance, you will pay less interest in a short month (a month with less than 31 days) than in a month with 31 days.
Do you feel lost yet? Don’t worry, because once we get it all together, it will make sense. I’ll also explain how to test your spreadsheet to make sure it’s working properly. The initial setup of a spreadsheet is the most challenging step.
At the top of the spreadsheet, enter basic information about your insurance, such as: starting balance, interest rate, monthly payment, repayment due date, and interest rate factor. The interest rate factor is the interest rate divided by the number of days in a year. Again, each lender and insurance type differ in terms of the number of days used in the year. The informational part of the spreadsheet is important because you want to clearly see the variables that affect your insurance.
After entering the basic pieces of information, you can start creating the interactive spreadsheet. Your goal is to create a spreadsheet showing when each payment is posted, how much each payment applies to principal and interest, and what the closing (or current) balance is. The names of the columns you will create are (from left to right): Payment date, Principal Amount, Interest, and New Balance. Below is a more detailed explanation of these columns:
• Payment date – This is the date your payment is actually sent to your account. This is critical because the interest on your student insurance will likely be based on the actual number of days between payments.
• Principal – This will be an equation equal to the payment amount minus the interest portion of your monthly payment. It is the portion of your payment that will be applied to reduce your balance.
• Interest – You need to know how the lender calculates the interest on your insurance. It is usually based on the actual number of days multiplied by the previous month’s balance multiplied by the interest rate factor. Your Excel formula will be: (current payment date minus previous payment date) x previous month balance x interest rate factor.
• New Balance – This is equal to the previous month’s balance minus the principal portion of your current payment.
If your lender has a website that lets you see information about your insurance and/or make payments, create an online access right away. Print your insurance balance history and start creating the spreadsheet with the down payment as a starting point. The balance record should show how much of each payment has been applied to principal and interest. This is how you can test your spreadsheet to make sure it is working properly. Check to see if your formula results match the archives on the website. If they do not match, you will need to troubleshoot to find out the cause. The reason may be that the lender made a mistake, but it is more likely that the error is in your spreadsheet. If you have a friend or family member who is an Excel user, see if they can help you. The web is a great resource as well.
The real power of a spreadsheet is that you can simulate what-if scenarios easily. For example, let’s say you receive a large cash win. You can enter this number in your spreadsheet and easily see the results of such a big bonus. You may learn that if you make the additional capital reduction payment, your insurance will be paid off in ten years instead of 15. You may find this very motivating. However, if you don’t have a tool like a spreadsheet to generate this kind of information, you may choose to do something else with your money.
Step 2) – Strategies to Accelerate Yield
Congratulations on creating a spreadsheet where you can track student insurance balances and payments. Tracking the insurance in this way gives you control over the insurance. Getting a statement in the mail every month and not understanding why your balance has moved so little doesn’t motivate you and adds to the sense of desperation (and you don’t really want to go back to cheap beer and reboot Gilmore Girls). Here are some specific strategies to help you pay off your insurance quickly:
Pay A Little Each Month – We’ve all heard this before, especially when talking about mortgages. Well, the same goes for student insurances. When you make a monthly payment, part of that payment is applied to interest and the rest to principal. My suggestion: Pay the additional principal amount that will result in the insurance balance having two zeros at the end of it. For example, if your balance will be $37845.21 after you make the next payment, pay an additional $45.21 to make your base balance $37,800. Getting your insurance up to the hundred dollar figure is a strategy to encourage you to pay an extra amount each month.
To facilitate this strategy, I suggest you pay off your insurance electronically. You have no control over when your payment is posted when it is mailed. When you make an online payment, you usually specify the date the payment will be posted. In addition, there will likely be a section to enter the additional amount of capital that you are willing to pay.
The benefit of paying more than the minimum payment is that when the next insurance payment is made, a larger portion will be applied to the principal and less to the interest (compared to if you did not pay the additional amount in the previous month). If you continue to pay more than the minimum due, this effect will double each month. The result is that you will pay off your insurance much faster than if you had only made the minimum payment. This is because as your balance decreases, the amount of interest you pay decreases. More each payment will be applied to reduce capital. It’s easy to see this effect when you track it in a spreadsheet, which is why doing so is such an effective strategy.
Make a plan to pay the “extra lot” on a regular basis — if you get a tax refund each year, apply it to your student insurance balance. This will have a huge impact on how quickly your insurance is paid off. If you get a bonus every year, apply that as well. Any windfall, or “money found” instance should be used to reduce your balance. It is not uncommon for people to treat “earned money” differently. ‘Money found’ is often wasted on ‘bragging’ items. Resist this urge! Use any extra money, no matter where it is or how you got it, to pay off your student insurance balance!
In short, the steps needed to help you pay off your insurance faster are:
1) Use a spreadsheet to keep track of your insurance so that you can see how much each payment goes into principal and interest. Implement what-if scenarios so you can see the impact of your insurance repayment and formulate a strategy for doing so.
2) Pay a little extra each month. One strategy is to pay extra so that your balance is an equal increase of $100.
3) Commit to making large payments when you have a sudden cash gain, such as an income tax refund or bonus. While this may not provide an immediate reward, the long-term consequences will be significant. Time really flies, and what may seem like a huge stock now can be reduced to zero in much less time than you think, but only if you make it a priority and a goal.
Paying off a student insurance can seem stressful. However, if you use the strategies presented here, you will learn that you can succeed more quickly than you could ever imagine. You can apply these same ideas to mortgages and other insurances. Controlling your money is empowerment. Incidentally, I started this article by referring to the five stages of grief. In the event of your death, please be aware that in most cases your insurance will die with you – unless you are reunited with a spouse. In this case, unfortunately, the insurance will continue!