Are you one of the record number of people who made a financial New Year’s resolution for 2014? If so, congratulations! Whether your goal is to pay off debt, increase your savings or start investing for the future, there’s no time like the present to get started.
But if you’re one of the millions of Americans with student loans, it’s hard to know where to begin. How do you find extra money after making your student loan payment each month? Should you wait until your loans are paid off to start investing for retirement? If not, how much money should you allocate to each goal?
While everyone’s situation is unique, there are a few rules of thumb that can help you reach your financial goals no matter how much student loan debt you have. Here are six tips that can help you build a solid financial strategy for 2014 and beyond:
1. Start small
If you’re like most people with student loans, you don’t have a lot of extra money to invest or save at the end of each month. But don’t let that stop you from trying – a small, consistent amount can make a big difference over time (and is far better than nothing at all).
The key is to focus on one thing at a time and just do what you can when you can. For example, if you don’t yet have an emergency fund (see #3), start by putting whatever you can afford into a high yield savings account each month. Many banks offer automatic transfers or savings programs that will help you continuously drip money into the account without feeling like it’s a huge economic loss. And if you get a windfall, like birthday money or a bonus at work, put half of it in that account. Then, when your emergency fund is stocked, move on to the next goal.
2. Reduce high interest rate debt
If you have multiple sources of debt, a common rule of thumb is to try to pay off your high interest rate loans first. For example, you might pay the minimum on your low interest rate subsidized loans but tackle your high rate unsubsidized, PLUS or private loans more aggressively. It’s also worth looking into refinancing these loans at a lower rate. The lower the interest rate on your loans, the faster you can pay them off – and the sooner you can start using that money for saving and investing instead.
And if you have any credit card debt, pay it off and keep it that way. Carrying a balance on a high interest credit card will only sabotage the rest of your financial strategy.
3. Give yourself a cushion
Financial experts recommend that you have 3-6 months worth of living expenses saved in an emergency fund in case your income suddenly disappears. This is crucial for student loan borrowers, since even one late or missed payment can have a material impact on your credit score. Make sure your emergency fund will allow you to pay all of your bills, including minimum payments on your student loans, for at least a few months until you’re back on your feet.
4. Invest as soon as possible
When it comes to retirement investing, time is one of the best tools in your arsenal. The sooner you start investing, the more time your portfolio has to grow through the magic of compound interest. But if you wait to get started until your student loans have been totally paid off, you’ll miss out on a lot of that precious time.
That said, you don’t want retirement investing to come at the expense of your overall financial health. For example, you may want to delay or minimize investment contributions until you’ve paid down your high interest rate debt and established an emergency fund (see #2 and #3). You can plan to increase contributions when you have only low interest rate student loans left on your plate.
5. Take the (free) money and run
When you’re ready to start investing, there are a lot of account options out there. Start by checking with your employer to see if they offer a defined contribution plan, such as a 401(k), and whether they’ll match your contributions. If so, a good goal is to contribute at least the amount that they match each month.
If your employer doesn’t offer a defined contribution plan or you’re self-employed, there are a number of other tax-advantaged accounts that can help you grow your nest egg. To find the right one for you, do your research and talk to a financial professional, if necessary.
6. Adjust as needed
Your financial situation may look different in 2015 than it does in 2014, so make sure to revisit your strategy every so often (quarterly is a good goal, but annually at a minimum). For example, a raise or a bonus may allow you to finally pay off one of your loans, top off your emergency savings or increase your retirement contributions. Before you spend that money on things you can’t even remember later, apply it to your financial strategy – and the long-term rewards will be great.
Nothing in this blog post purports to offer investment advice. You should check with your financial advisor if you have questions.