Step 13: Set a Goal for % of Income to Spend on Debt Repayment?

Reader AriKS asked the following helpful and interesting question:

I am a recent law grad 50(ish) days away from the end of my deferment period. I am just wondering as I plan to take my first foray into the real world and repayment what percentage of your net income you have dedicated to paying down your debt. Thanks!

First off, big BIG congratulations to AriKS on graduation and all that comes next!

I wrote AriKS a short answer, but asked his permission to post his question and a longer and more detailed response once I had the time to think about it.  He generously agreed.

Here’s the short answer to this question.  Mr. DebtFreeJD and I, at a minimum, spend 100% of my after-tax salary on my debt.  I don’t contribute to a 401K, but Mr. DebtFreeJD does.  This means that every month we aim to spend at least 62% of our net (after tax, after 401K) income on my loans.

Here’s the long answer.  We aren’t orthodox about this: some months we spend more than that, and others, we spend less.  Rather than aiming for a strict % amount, we keep some guidelines in mind when determining how much of our money we’ll spend on debt each month.  These include:

  1. All “surprise” or unexpected income goes 100% towards debt.  Do not pass go, do not collect $200.  So, for example, I received an inheritance of about $4,000 recently.  Every dime went to debt.
  2. Mr. DebtFreeJD and I keep a very large emergency fund (consisting of funds in our checking and savings accounts).  Honestly, it’s probably larger than it should be.  Regardless, if there’s too much in that fund at the end of the month, after paying our rent and credit card bills, all the extra goes towards loans.
  3. Conversely, if we have a large expense one month, we may not pay as much towards loans to make sure we maintain a balance we consider reasonable in our emergency fund.  For example, we heat our apartment with oil (cha-ching!) and so had to pay up to fill our heating oil tank.  This costs about a gazillion dollars, and we may pay less towards loans this month.
  4. In general, a big motivating force is that my remaining loans come with approximately an 8% interest rate.  This is HIGH! And so, we’re motivated to pay them off as quickly as possible.  However, everyone’s case is different.  If, for example, your employer has a 401K match (mine does not, which is not unusual for a law firm) you might think harder about making 401K contributions than I do.  Or, if your interest rate is very low, you might have more incentive to invest in stocks while paying off your loans at a slower rate.
  5. At the end of the day, sometimes paying off student loans is not really about the math.  I hate being in debt.  The first financial lesson my parents taught me was to abhor owing other people money.  I am very motivated to get rid of my loans as fast as humanely possible.  Other people may feel differently.  I’d suggest running different scenarios (like, if I contribute x% of my income to student loans, how soon will I be done?), and seeing what feels comfortable for you.
  6. In short, the real answer to this question is:

We contribute as much of our income to student loans as we can without feeling we’ll leave ourselves up a creek without a paddle if a big emergency arises, and one of us can’t work for a while.


We also make sure we have a sufficient amount left over to keep Dog DebtFreeJD in the style to which she has become accustomed.

We also make sure we have a sufficient amount left over to keep Dog DebtFreeJD in the style to which she has become accustomed.


6 thoughts on “Step 13: Set a Goal for % of Income to Spend on Debt Repayment?

  1. Julie

    Great post! As a medical student who is also going to graduate with 6-figure student loans (when combined with my hubs existing loans), this is extremely helpful! I’m wondering why you have decided to keep a larger emergency fund, rather than putting the max you can into debt (and thus save on interest in the long run)?

    1. DebtFreeJD Post author

      Thanks for stopping by, Julie! Without going into too many details, in the last couple of years we DID have an emergency. Without our extravagantly large emergency fund, we would have been really up a creek, but with it, we were able to comfortably handle the months of reduced income without too much extra stress on top of the already very stressful emergency situation.

      This did not happen to me, but at the time I graduated emergencies of one kind or another were happening to any number of new lawyers in the form of deferments, job withdrawals, and flat-out inability to get hired by somebody who paid. This reinforced my commitment to having an extra-large emergency fund, just so that if we ever need to break the glass again, the money is there.

  2. mrs TIP

    great post, great ground rules. 8%?? that’s truly a pain…our highest are 6.8%.

    we probably could stand to plump up our emergency fund, especially since we have kids. i mean, we have SOMETHING….but not a whole lot. >_>

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