Are you one of the many people who make financial resolutions every New Year? 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 debt , 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 a savings account or begin investing ASAP for retirement? How much money should you allocate to each goal?
6 Tips to Build Your Savings—Even with Student Loans
While everyone’s situation is different, there are a few rules of thumb that can be useful when you’re trying to build a solid financial foundation, no matter how much student loan debt you have. Here are six steps that could help you get started.
1. Starting Small
If you’re like many people with student loans, you might not have a lot of extra money to invest or save at the end of each month. But that doesn’t have to stop you from trying. Putting away a small but consistent amount every paycheck, or once a month, can make a big difference over time. (Even a little something is better than nothing at all).
If you feel overwhelmed, perhaps focus on one or two goals at a time and just do what you can when you can. Maybe you want to save for a car or to put a down payment on a house. Or perhaps you don’t yet have an emergency fund (see #3).
You can start out by putting whatever you can afford into a high-yield savings account each month. Online-only financial institutions, like SoFi, are often able to offer more competitive interest rates than their brick and mortar counterparts.
So, if your money is sitting in a basic checking account, you could be missing out on the extra growth an online account can offer.
If you don’t want to think about setting that money aside every month—or worry that you won’t have the discipline to stick to your plan—you can arrange automatic transfers with your financial institution.
Some financial institutions also offer programs that can take a bit of the sting out of saving by rounding up expenditures to the nearest dollar and depositing the difference into your account.
And should you get an unexpected financial windfall—a tax refund, some birthday money, or a bonus at work—putting all, or a portion of it into that savings account can give it a nice boost here and there.
2. Reducing High Interest Rate Debt
If you have multiple sources of debt, it may make sense to focus your efforts on those with the highest interest rates first.
Of course, you should always pay at least the minimum on every debt you have each month. But if you have credit card debt as well as student loan debt, you might benefit from using a debt reduction strategy to pay off your bills.
Everyone’s financial situation is different, and there’s no “right way” to tackle debt, but we think SoFi’s “Fireball” method offers a balanced approach, because it targets high-interest debt and helps keep you motivated as you knock down each bill. Here’s how it works:
1. First, you’d separate your bills into “good” and “bad” debt. “Good” debts are those that can help you build your net worth—like a mortgage, business loan, or student loans. Good debt usually comes with a lower interest rate—typically 7% or less. “Bad” debt is different, because it can inhibit your ability to save money, and with higher interest rates, it’s usually more expensive in the long run.
2. Next, you’d take those bad-debt bills and list them in order from the smallest balance to the highest. Take the No. 1 bill on that list (the one with the smallest balance), and once you’ve paid the minimum on all your other bills—you could make it your mission to funnel any extra cash toward knocking down that balance.
3. Work your way down the list until all the bad debts are paid off. Once you blaze through the list, you should have more money to put toward the next bill and the next, until you get to and through the highest balances.
4. Carrying a balance on a high-interest credit card is kind of like swimming with weights tied to your ankles—it can make your financial strategy more difficult than it needs to be. So the last step of the Fireball method is to keep those balances paid off.
If you only have student loans, you can still use the Fireball method to pay them off. For example, you might pay the minimum on your lowest-interest subsidized loans while paying down your high-interest, unsubsidized PLUS or private loans more aggressively.
It also may be worth looking into consolidating your non-educational debt with a personal loan or, if you qualify, refinancing your student loans at a lower interest rate. A lower interest rate can reduce the amount of money you spend on any debt over the life of the debt.
And if the debt seems overwhelming—if, for example, you have multiple student loans—combining them into one payment could make things more manageable. (It’s important to note, though, that if you refinance your federal loans with a private student loan, you will lose access to borrower protections, such as Public Service Loan Forgiveness and income-driven repayment plans.)
3. Giving Yourself a Cushion
A general rule of thumb is to have three to six months’ worth of living expenses saved in an emergency fund in case you’re faced with an unexpected expense or if your source of income should suddenly disappear.
This is especially crucial for student loan borrowers, since, in some cases, even one late or missed payment can have an impact on your credit score. The ultimate purpose of an emergency fund is to create a financial cushion that allow you to pay all of your bills, including payments on your student loans, for at least a few months until you’re back on your feet.
4. Considering Investing as Soon as Possible
When it comes to retirement investing, waiting can cost you money. The sooner you start investing, the more time your portfolio has the potential to grow through compound interest.
Delaying your savings means you may need to save more on a monthly basis down the line. If you wait to get started until your student loans are totally paid off, you could be missing out on a lot of 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 debt and established an emergency fund (see #2 and #3). Instead, you could plan to increase contributions when you have only low interest rate student loans left on your plate.
5. Take the (Free) Money and Run
If you’re ready to start investing even though you still have student loans, there are a lot of account options out there. You could start by checking with your employer to see if the company offers a defined contribution plan, such as a 401(k), and if there is some type of matching contribution.
Many employers will match an employee’s elective deferral contribution up to a certain dollar amount or percentage of compensation. If that’s a perk at your place of business, why not aim to make the most of that match?
If you can do more, a frequently cited target is to save 15% of your income annually. But remember, if you start saving for retirement early, even small contributions can have an impact.
If your employer doesn’t offer a defined contribution plan or you’re self-employed, there are a number of other tax-advantaged retirement accounts that can help you grow your nest egg.
If you’re opening your own retirement savings account, such as a traditional or Roth IRA, you can do so at a brokerage firm, a bank, or an online financial services company, including SoFi Invest®. To find the right account for you, do your research and talk to a financial professional if needed. (As a SoFi member, you can get one-on-one access to financial advisors on the house.)
6. Adjusting as Needed
Your financial situation may look different each year, so you may want to occasionally revisit your strategy. (Quarterly might be a solid goal for you, but if that seems like a lot, an annual review could still be helpful.) In between reviews, you may find that using a tracking app can help you stick to your plan.
With an app like SoFi Relay, you can set goals, track your spending, and monitor your savings. As part of that review, you also may want to see if your investment account still matches the asset allocation you’re comfortable with, or if it needs rebalancing.
Staying on top of the day-to-day movements in your financial life can help you make better decisions for now and the future.
The next time you think about making an impulse purchase, you might decide to apply that money to your financial strategy instead. And if, down the road, you get a new job, get married, or get pregnant, you’ll have a head start on planning for what’s next.
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If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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