After the TSP, I invest my money in Betterment and Vanguard. I track all of my investments with Personal Capital. I also wrote a short, 2 hour book summarizing this site. You can buy it here.
I’ve heard from several people that they only make the minimum payments on their student loans because they have tax advantages. Basically, the interest you pay on a student loan is tax deductible, so it lowers the amount of money you can be taxed on, therefore lowering your tax burden. Shouldn’t I just keep making the minimum payments so I can claim the interest on my taxes every year? Short answer: no. Long Answer…
Sallie Mae, a leading provider of student loans, usually requires their student loans to be repaid in 10 years. The interest rate varies for each loan, but thanks to the Servicemembers Civil Relief Act, all credit obligations incurred before entering active duty MUST be no greater than 6% per year, including credit cart debts and student loans. So let’s say for arguments sake that your interest rate is 6%.
If you just make the minimum payments on these loans, you’ll end up paying $12,000 in interest over the 10 years! Now, the first year, when you’re paying the most interest with each payment, you’ll be able to claim $2200 of interest payments. Not bad right? Well, this $2200 is an adjustment on your tax return, so it lowers your adjustment gross income, which is turn lowers your tax due.
Many servicemembers fall into the 15% bracket, so we’ll use that. A $2200 adjustment only reduces your taxes owed by $330. And this amount will decrease every year you pay off the loan, as the interest becomes less and the principle becomes a greater proportion of the payment. So over the 10 years, you’ll possibly have $1800 of taxes removed. Now, if instead of just making minimum payments you added $200 a month to your payments, you’d pay the loan off 4 years earlier and save $5000 in interest payments! And, you’ll still be able to claim the $7200 in interest, for a $1080 tax break.
|Minimum Payments ($397.42)||+$200 per month|
|Time to Loan Payoff||10 years||5 years, 10 months|
|Interest Paid over 10 Years||-$12,690||-$7219|
|Tax Break at 15% over 10 years||$1903||$1082|
2 Websites I Use to Achieve Financial Independence
The best way I know to achieve financial independence is to keep your investments simple, diversified, automatic, and low-cost. Costs eat into your returns like you wouldn't believe! A 1% difference in expense ratios can mean $100,000s lost to fees over a lifetime of investing.
Even if you're a DIY (do-it-yourself) investor like I am, you need to check out Betterment. You can read my full review here, but the bottom line is for only $250 per $100,000 invested (0.25% expense ratio) you get simple, diversified, and automated investing. In addition every account now gets free Tax Loss Harvesting+ features, which should increase returns for the average investor more than the minuscule management fee.
If you're not a DIY investor or are just getting started with investing, then you definitely need to check out Betterment. It's what I recommend to my family and friends who aren't strong investors or don't care to learn about asset allocations, diversification, or rebalancing.
I have investment accounts all over the place. To keep track of all of them in one place I use Personal Capital. It combines all of my accounts, shows me where I may be overpaying in fees, and provides beautiful charts showing my overall asset allocation and performance.
I use Personal Capital to track my Roth and Traditional TSP, Vanguard IRAs, banking accounts, SDP, and my Betterment taxable account, all in one place. It's free, secure and presents me with a one-stop dashboard so I can see all my money on one site.
Read my full review of Personal Capital and see how easy it can be to manage your investments in one place. Trust me, once you try it, you'll love it.
P.S. - If you have over $100,000 of assets and a 401k, you really need to run the Personal Capital 401k Fee Analyzer.