Life After Refi: 6 Things to Do With Your Student Loan Refinance Savings
Student loan refinancing is most likely the first major financial decision you’ve made as a young professional—and it was a smart one. For starters, you’ve achieved an immediate psychological win, and you can breathe easier knowing you’ve taken a strong step toward eliminating your student loan burden. Plus, by scoring a lower interest rate and more manageable monthly payments, you now have wiggle room to chalk up some other financial gains.
Here’s how to get cracking on achieving major money milestones now that you’ve refinanced your student loans:
1. Track your spending.
If you haven’t already created a budget, do so and take it seriously. Tracking your income and expenses—and automating monthly loan payments—will give you a sense of where your money goes, and guide you toward spending mindfully. Budgeting will also help you allocate cash toward your short-term (i.e., home down payment) and long-term (retirement) savings objectives.
2. Pull out your crystal ball.
Now that your student loans are no longer suffocating you, give some thought to what’s next on your personal and career agendas, and how you’ll accomplish those goals. Do you plan on relocating for a new job? Is marriage in your future? Children? Focus on the debt you currently carry and how it influences your long-term financial objectives.
Since refinancing reduced your student loan interest rate, you can save thousands of dollars over the life of the loan. That means you can continue to make minimum payments and redirect those savings toward growing your investment portfolio, reducing bad debt, or saving for a wedding, for example.
Think about it this way: A big drop in loan interest usually means that more of your payment can go toward the principal than before, especially if you’ve been paying the loan for a while. Other factors at play might include a new loan term, so start number-crunching. You’ll likely realize that putting extra funds toward maxing out your 401(k) instead of accelerating your loan payments, for instance, will garner a higher return.
3. Become conscious of tradeoffs.
In order to complete your money missions, you’ll have to accept that they come with tradeoffs and sacrifices. This mindset will help you avoid falling victim to “lifestyle inflation”—the idea that as you earn more, your needs and desires get more expensive. So instead of joining another wine club, for example, focus on actions that provide long-term value and happiness, such as strengthening your investment portfolio and saving for a home.
Learning to make sacrifices early in life will keep you on the right track financially. That being said, don’t feel like you have to give up everything you enjoy. Go ahead and celebrate wins, make memories, and treat yourself to nice things—just avoid deviating too far from your big-picture goals.
4. Tackle high-interest credit.
If you have credit card debt, dealing with it is of the utmost importance. The money you’ll save by eliminating a revolving balance that typically carries an interest rate of 15% or more can go toward building your nest egg or saving for your child’s education.
Consider consolidating your credit cards into a personal loan to secure a lower interest rate. Paying down credit card debt can also improve your credit score, which will help you qualify for more favorable interest rates and terms in the future. Debt utilization—the amount of debt you have compared to your credit limit—is the second biggest factor that FICO and other scoring models use to calculate your credit score. So if you have a $10,000 credit card limit and owe $7,500, that equates to a 75% debt utilization rate. To maximize your credit score, aim to keep that rate under 30 percent, but as close to zero as possible.
5. Save for your dream home.
When you’re hoping to buy your first home, coming up with a down payment is probably your biggest obstacle. But the savings from your newly refinanced student loan and—should you choose it—credit card consolidation can get you on track.
If you live in a high-rent city or plan on relocating to one, buying a home could be just as affordable as renting. Plus, you can save for a down payment while still paying down your student loans. The fact is, you might not even have to save as much as you think. Although conventional wisdom says to put 20% down on a home, you might qualify for a mortgage with as little as 10% down, or even just 3.5% if you go with a government-insured FHA mortgage.
To get started, create a home savings account and automate deposits to it each pay period. You’re more likely to stick with it if you never actually have the cash in hand. You might also consider tapping into other assets, such as a Roth IRA, which allows you a one-time, penalty-free withdrawal if you’re using it for a first-time home purchase.
6. Fund and contribute to retirement accounts.
Using your student loan refinancing savings to fund your retirement accounts will put you that much ahead of the game. If you have an employer-matching 401(k) that you’re not maxing out, that should be your first move.
If you have savings left over, contribute to an individual retirement account, such as a traditional, Roth, or SEP IRA. Choose a low-cost investment platform to save on fees while building your savings. Just be aware that you may be penalized and taxed for early withdrawals, so work with a professional. Investing in retirement while in your 20s and 30s will make a huge difference in the long run, thanks to compound interest, which allows your earnings to also earn interest.
Leveraging the money you save by refinancing to achieve your financial goals takes forethought and determination, but the sooner you get started, the better. Whether it’s buying a home, developing a strong investment portfolio, or finally achieving debt-free status, putting your money to work for you will get you closer to your dreams.
Speak to a SoFi Wealth Advisor today to help put your post-refinance game plan in motion.