The path to prosperity has never been easy, but these days you could argue it’s a lot less simple than it used to be. A big factor? Student loans — and lots of them. Today more people are taking on a larger amount of education debt than ever before. And when you’re shouldering five or six figures worth of debt, the idea of simultaneously building wealth is not exactly a straightforward proposition.
Even if your degree has afforded you a better salary, it can be difficult to know exactly where to begin. Should you wait until loans are paid off to tackle saving for retirement? If not, which goal do you prioritize? And how do you do both without breaking the bank?
While everyone’s situation is unique, the key for most people is to get a solid strategy in place. Here are a few tips to help you do just that:
1. Do the math
It’s essential to start with a full picture of your financial situation. How many student loans do you have, how much time is left on each and what are the interest rates? What about interest rates on other debt, like credit cards and auto loans? How much money can you put toward saving and investing after you’ve paid your bills each month? You’ll need to know the answers to these questions in order to create your plan.
2. Lay the foundation
Most financial experts agree that it’s crucial to a have three to six months worth of living expenses saved up in case anything happens to your income. For student loan borrowers, this is especially important because even one late or missed payment can damage your credit. If you don’t already have an emergency fund in place, this would be a good place to start.
3. Decimate high-rate debt
Along with building a savings cushion, eliminating high-interest rate debt should be top priority. Whether you decide to tackle these goals at the same time is up to you. Just remember that step where you did the math — if you’re putting $50/month toward savings but spending $100/month on high interest debt, you’re essentially taking one step forward and two steps back.
The usual culprit here is credit cards — perhaps you opened one or two to help pay for expenses during or after school. But if the introductory interest rate has gone up and you’re now looking at double digits, you’ll want to eliminate that debt pronto. If you’ve got solid credit, one tool that can help you do that is a low-interest rate personal loan. And once your credit cards are paid off, keep it that way. Nothing sabotages a wealth-building strategy like carrying a credit card balance.
4. Fine tune student loans
Next, take a look at your student loans. When you have multiple sources of debt, a common strategy is to pay off the higher interest rate loans more aggressively. For example, you might pay the minimum amount on your subsidized federal student loans but put more than the minimum toward your high rate unsubsidized PLUS or private loans. Another great option is to look into refinancing student loans, which can cut the interest rate significantly, save you money and potentially help you be done with your loans sooner.
5. Take advantage of free money
When you’re ready to start investing, start by looking into your employer’s retirement plan to see if they offer matching contributions or other benefits. If they do, a good goal is to contribute at least what they match each month. If your employer doesn’t offer a plan, there are a number of tax-advantaged qualified accounts to choose from. To find the right one for you, it might be worth consulting a financial professional.
6. Check in regularly
Your financial situation might look different a year or even a few months from now, so it’s critical to update your plan on a regular basis. For example, if you don’t qualify or choose not to refinance student loans this year, you might be able to next year — and it’s never too late to reap the savings benefit. Put a reminder on your calendar to review your plan at least yearly, if not quarterly.
It can be tempting to put off thinking about saving and investing until your student loans are paid off, but the problem with this approach is that you risk losing several valuable years of compound interest and investment returns. Depending on your goals, that may be a costly mistake you don’t want to make. With a solid plan in place, you’ll be better able to manage student loan payments while also working toward your financial goals.
This blog post does not purport to offer investment advice. You should check with a financial advisor if you have questions.
Dan Macklin is a member of the DailyWorth Connect program. Read more about the program here.