You’re a successful college graduate. You made it through all of your classes and secured a job in your chosen field. You’re on your way to building a successful career and establishing your life as an adult.
Now that you’re in full-on adult mode, you’ll have to start making some pretty big decisions. What are your short-term goals? What are your long-term goals? How are your finances stacking up to help you get there?
One of the questions many young adults face is whether it’s better to pay off student loans (or other debt), save, or invest. With rising levels of student debt across the nation, this question is not uncommon. College students who graduated in 2016 have an average of $37,172 in debt .
So when it comes to determining where to put your hard-earned resources, what should you do? You don’t have to think of it as choosing between one goal and another. With some strategic thinking and careful planning for your financial future, you could do all three
Making a Budget
A good first step to any financial conundrum is to fully evaluate the situation. You could start by gathering all of your financial documents including tax statements, bank statements, credit card statements, and statements on student loans or other debts. Then, list out all of your monthly expenses—fixed expenses, like rent, and variable, like dining out.
Now, tally up all sources of income and list out your savings. After you’ve done this, you should have a pretty clear idea of how much money you’re spending, what you’re spending it on, and how that compares with the money you are bringing in every month.
Now that you have a big picture view of your spending habits, is there any room to make changes? Take a look at any of your current subscription services with monthly payments—if you’re not actively using them, maybe it’s time to cancel.
If you’re willing to call your internet or cable provider, you could try to negotiate a lower rate. After you’ve made any changes to your spending, make a new budget—one that details how much money you’re going to put toward your student loans, your savings, and your investments.
Making Payments on Your Loans
Regardless of what your financial goals are, you probably don’t want to forget about your loans and the payments due on them. Failing to make payments and allowing your loan to become delinquent or go into default can have serious consequences for your finances and credit score.
By paying the monthly minimum payments, you can make sure you stay in good standing with your loan servicer while still making progress toward your loan repayment.
Revising Your Loan Repayment Plan
If you are having difficulty making monthly payments on your loan due to temporary financial issues, you could consider putting the loan into deferment or forbearance. Just know that while the loan is in forbearance you will be responsible for paying the accrued interest on the loan.
And depending on the type of loan you have, you may be responsible for accrued interest during deferment as well. If your issues with repayment will last more than a couple of months, consider adjusting your student loan repayment plan.
If you have federal loans, you can change your repayment plan at any time, at no cost to you. The standard repayment plan for federal student loans is a fixed monthly payment over a 10-year term. If this is too much for your current financial situation, there are other repayment plans to consider.
The Extended Repayment and Graduated Repayment plans offer repayment terms over 15 or 20 years, which could make your payments more manageable on a monthly basis.
There are also four Income-Driven Repayment plans which allow you to pay a portion of your discretionary income—usually 10%, 15%, or 20%—over 20 or 25 years. These options would lower your monthly payments, meaning you would have more money to save for a rainy day or to invest. But, it’s important to note that by extending your repayment term, you will be paying more in interest over the life of the loan.
Another alternative to consider is refinancing your student loans. Refinancing could allow you to lower your interest rate, adjust your monthly payments, or customize your repayment term. When you refinance, you take out a new loan with a private lender. However, this means you forfeit federal loan benefits, such as access to income-driven repayment plans, deferment, or federal loan forgiveness programs. So, if you’re taking advantage of a federal loan program, refinancing might not be for you.
Whether you’ve freed up some of your earnings with an income-driven repayment plan or by refinancing, you may be able to redirect some of those funds into your savings account. If you’re not sure what your first savings goal should be, you could consider saving for an emergency fund. Putting aside money for a rainy day can help you stay on top of your loan payments even in the face of an unexpected financial hit.
Paying Off High-Interest Debt
When it comes to debt, the interest rates on student loans are relatively low. While you are making monthly payments on your student loans, it could be smart to tackle any high-interest debt you have laying around.
For example, credit card APRs can range anywhere from 15% to 20% , which means debt can rack up quickly. If you are carrying credit card debt, you might try either the debt snowball or debt avalanche
method to pay it down.
With the debt snowball method, you’ll focus on your smallest debt first, regardless of the interest rate. The idea is that by paying off your smallest debt first, you’ll stay motivated to continue making payments on your debt. After you pay off your smallest debt, you move on to the next smallest, and so on, until all of your debt is paid off. The accomplishment of repaying your debts provides motivation to continue paying off the money you owe.
With the debt avalanche method you’ll focus on the debt with the highest interest rate first. Make a list of all your debts by order of descending interest rate. While making your minimum monthly payments on all the debts, you would “attack” the loan with the highest interest rate with as many extra payments as you can. This method can require more discipline, but keeping track of how much you are saving in interest can be a great motivator.
Another option for getting your credit card debt under control is to consolidate it with a personal loan. Personal loans often have lower interest rates than high-interest credit cards and, as a result, you could save money on interest.
Another benefit of consolidating your credit card debt: You’ll only be responsible for making one monthly payment to one lender instead of multiple payments to a variety of credit card companies and lenders.
Keep in mind that you’ll need to keep those credit card balances low after paying them off, since running them back up has the potential to make your credit profile less attractive to lenders due to the increased total debt.
Building Your Emergency Fund
Now that you have a handle on your debts, it’s time to talk saving. As we mentioned earlier, the first order of business you might consider is building an emergency fund. You can use this fund to cover any unexpected expenses that might occur due to a medical emergency, sudden layoff, car repairs, etc. Even starting with a small amount can help when emergency expenses pop up.
Saving for Your Retirement
Saving for retirement is important. Whether contributing to your 401(k) or IRA, what you are fundamentally doing is investing. And when it comes to investing for your future, one of your biggest assets is time. To see how your retirement goals stack up, take a look at SoFi’s retirement calculator.
If you are eligible for an employer-sponsored 401(k) plan, it could be smart to take advantage of it. Some employers offer a matching contribution up to a certain percentage when you contribute to a 401(k).
Employer contributions are determined at the discretion of the company. Take a look at your employer policy and see if you’re able to contribute enough to get the full employer match.
Another option for retirement savings is setting up an IRA, or Individual Retirement Account. There are two types of IRAs, traditional or Roth, and they differ in two key ways. First, you can only contribute to a Roth IRA if your income falls below a certain limit.
Second, traditional IRAs allow you to deduct some of your contributions on your tax returns now, meaning you pay taxes on distributions when you retire. With a Roth IRA, you contribute funds after taxes, but you can withdraw money in retirement without paying taxes on it.
Is It Better to Pay Off Student Loans, Save, or Invest?
As you move through life, retirement will be just one of your many financial goals. You may want to work toward buying a house, saving for a child’s education, or taking an extravagant vacation. No matter what your financial goals are, investing could help you meet them.
The key to understanding whether it is better to invest or pay off student loans is opportunity cost. Student loans often have relatively low-interest rates, and if you’ve refinanced your loans, you may have secured an even lower rate.
For example, say your student loan interest is 4%, while the stock market has (hypothetically) yielded average returns of 7% over the last five years. Generally speaking, earning 7% interest makes more financial sense than paying down debt at 4% interest. Investing comes with risk, but investing can be a great way to grow your money in the long run.
Investing With SoFi
With SoFi’s automated investing platform, SoFi Invest®, you’ll gain access to a team of financial advisors and cutting-edge automated investing technology. We’ll work with you to determine your financial goals and risk tolerance.
Then, we’ll set up your account to meet those preferences and we’ll auto-balance your investments to keep them in line with your goals as the market changes. And anyone can invest—you can get started with as little as $100!
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice [about bankruptcy].
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website on credit.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through `SoFi Wealth, LLC. SoFi Securities, LLC, member
FINRA / SIPC .