Are you one of the record number of people who makes financial New Year’s resolutions? 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?
6 Tips To Build Your Savings – Even With Student Loans
While everyone’s situation is unique, and there are no hard-and-fast rules, there are a few rules of thumb that can help you on the road to reaching your financial goals, no matter how much student loan debt you have. Here are six tips that can help you start to build a solid financial base.
1. Start Small
If you’re like many 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 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), you can start one by putting whatever you can afford into a higher yield savings account each month.
Many banks offer automatic transfers or savings programs that will help you continuously drip money into the account — like programs that automatically round up your expenditures to the nearest dollar and deposit the difference — that can help take the sting out of saving. And if you do get a windfall, like birthday money or a bonus at work, try to put half of it in that savings account. Then, when your emergency fund is stocked, you can 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 your student loans at a lower rate. The lower the interest rate on your loans, the more money you can save — money you’re not paying in interest.
And if you have any higher interest credit card debt, try to pay it off and keep it that way. Carrying a balance on a high interest credit card is kind of like swimming with weights tied to your ankles — it makes your financial strategy more difficult than it needs to be.
3. Give Yourself a Cushion
Many financial experts recommend that you have three to six months worth of living expenses saved in an emergency fund in case your source of income suddenly disappears.
This is especially crucial for student loan borrowers, since even one late or missed payment can have a material impact on your credit score. So it’s a good idea to 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.Consider Investing 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 the potential 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 typical rule of thumb is to save 15% annually. Remember, the earlier you start contributing, the smaller of a contribution amount you can get away with.
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 each year, 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. It is all about taking that first step. The next time you think about making a purchase, instead, apply it to your financial strategy!
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This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
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