It’s an age-old question. Should you pay off student loans or save money? You might hear advice to go full-speed ahead on debt repayment at the expense of your savings. But you also know that your savings can help you avoid further consumer debt and give you a cushion of cash. So what should you do? Here are some things to consider.
Save for an emergency fund first
Most personal finance experts agree that you should have at least three to six months of expenses saved up for an emergency fund. That can seem like an enormous amount, especially if you’re mired in debt.
But when have emergencies ever been cheap? Losing your job, having your car break down or becoming ill all have a steep financial cost.
Having an emergency fund with this amount can be a cushion so that when something happens you have liquid cash to deal with it. When you’re paying off student loans, you don’t want to add to it with credit card debt. That’s why you might consider paying the minimum on your student loans until you reach this savings milestone.
Plan for your goals
Saving for an emergency fund isn’t really fun, but it’s not just emergencies you should save for. It’s for fun stuff too, like your goals.
Do you want to be a homeowner in the next five years? Do you want to travel abroad once a year? Do you want to move to the Big City? Whatever your goals, you want to consider them in your savings plan, alongside your student loans.
Write down your goals, the timeline you wish to reach them, and how much you think you’ll need to make it happen. You’ll then want to reverse engineer this and work backward. Take the amount you’ll need and divide it by the months it will take to reach your desired timeline.
That’s how much you need to save each month to make it happen. Now take a look at that amount and compare it to your student loan payment. Can you do both? Or do you need to adjust the timeline a bit?
You want to be smart with your money by paying down debt but also incrementally save for your goals. I recommend using Capital One as they allow you to create many different savings accounts with different nicknames. So you can have a “travel” fund or a “down payment” fund and earmark that money.
Determine what’s really important
When thinking about if you should pay off student loans or save, it’s key to determine what’s important to you. Sure, there are a lot of “shoulds” in personal finance but it’s also personal.
Is your debt keeping you up at night and you want to give 110 percent effort toward debt repayment? On the other hand, maybe student loans don’t bother you that much and feel much more comfortable with money in the bank.
Money is highly emotional and you want to make yourself happy and assured with your financial choices.
For example, I always saved but when I was really serious about paying off my student loans, I depleted my $10,000 emergency fund over a matter of months down to $2,000 so I could pay more toward my debt. Why? Because I slept better at night knowing that I was tackling the $11 per day I was paying in interest.
Aside from figuring out what’s important to you, evaluate your risk. If you have terrible health insurance or high car insurance deductibles you might need to save more toward those buckets. If your field of work is unstable, you might need to have a larger savings.
Also, do you have a contingency plan? For example, if you were unable to pay your rent do you have somewhere to go? Do you have few responsibilities, such as no home, no kids, and no pets? That may make things a bit easier.
You want to look at what’s really important to you personally but also assess your risk factors in the equation. When figuring out if you should pay off student loans or save, it doesn’t have to be all or nothing. You can pay a bit over the minimum toward your student loans and automatically save 10 percent of your paycheck each month.
Look at the interest
When making your considerations, you want to look at how much interest you are paying, compared to how much interest you are earning in a savings account.
As I mentioned, I was paying $11 per day in interest and making hardly any money in interest on my savings account. For me personally, given this situation, it made more financial sense to attack my student loans.
Slash your expenses
Whether you want to pay off student loans or save or both, you obviously need money to do those things. You might feel stretched thin and wonder how you’re magically supposed to have money for your student loans and an emergency fund.
The easiest way to free up some money is to slash your expenses. Is there anywhere in your budget that you can cut back? Are there expenses for things that don’t make you happy or are no longer serving a purpose? Let them go.
Be smart with a side hustle
Another way to pay off student loans and save is to have one part come from your regular income and budget and to have any side hustle income help you reach another goal.
For example, maybe you pay the minimum on your student loans and automatically save 10 percent of your income. But you really want to get out of student loan debt. You can side hustle and decide to put all that income toward student loans.
Earmarking your side hustles for a specific purpose can help you be clearer on what to do with your money and give you motivation.
You can do a variety of side hustles including freelancing, driving for Uber or Lyft, pet sitting and more. Utilize your skills to earn more and allocate that money for your primary goal.
Pay off student loans or save
If you’re in a conundrum wondering whether to pay off student loans or save, consider all the factors above. This can help you create a repayment strategy and savings system that support your larger personal goals.
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