College graduation can be an exciting time, but paying for college debt and the newfound independence can be financially and emotionally overwhelming.
Leverage the power of compounding by saving more, which can help you earn money to help you pay down your loan
Paying off a student loan debt may be among your top financial priorities for several reasons, whether you’ve just graduated from college or whether you earned your degree years ago.
Student loans often fund an education that can prove valuable with increased job opportunities and higher salaries. Still, the debt can be substantial and it can feel restrictive. Without the burden of student loan debt, you might improve your credit score and your cash flow, and perhaps better qualify for loans for major purchases like a car or home.
About 69% of the class of 2018 took out student loans, and the average student loan debt was $29,800 per graduate, according to Student Loan Hero. What’s more, the total amount of student loan debt in the U.S., which has hit $1.56 trillion, is now higher than the nation’s total credit card debt.
The good news is, you can more easily pay off your student loans if you have a well developed plan. And a good financial plan takes your total financial health into account.
College grads have to weigh a number of factors—including what they pay for necessities like housing and non-necessities like entertainment—as they learn how their choices impact their financial health and weigh costs against savings.
“It’s a balancing act,” says Robert Siuty, senior financial consultant at TD Ameritrade. “It isn’t easy to save much when you’re just starting out. But even saving just a little bit counts. And it could really add up to something substantial in the future through the power of compounding.”
As graduates review their financial picture, Siuty says they should look at the interest rate on their student loan debt. Interest payments on the outstanding loan balance can really add up over time, so the faster you can pay down the loan, the more money you can save. Plus, if you can find a way to refinance your student loan to get a lower interest rate, you can also save money.
When it comes to maintaining overall financial health when you have student loan debt, remember to develop a retirement strategy best suited for your budget. Even with debt, you should not pass up a money-saving opportunity to save toward your retirement. If your employer matches a percentage of your contributions to your 401k, you could consider contributing the maximum to match that. This maximizes the free money you can get from the match. “When you’re starting out, taking advantage of a 401k early on makes a lot of sense, especially if there’s a matching component,” Siuty says.
Student loans can certainly take a toll on your finances. With a proper budget, you can better analyze your best strategy for paying the loans off sooner. A good budget takes into account expenses, including essentials like rent, car loan payments and food costs. It also takes into account non-essentials like luxury items, eating out and entertainment. A truly healthy budget will also factor in savings, whether for major purchases like a home or for preparing for retirement.
Even with a student loan, you can try to accomplish all of your financial goals. Looking at your total income is an ideal first step to budgeting. That will allow you to know how much in total you have to fund your needs. The next step is to determine your necessary expenses, such as rent and groceries.
Then, with the extra money, consider paying down your highest interest loans first, such as a credit card debt. Or, if your student loan is your loan with the highest interest, consider trying to make more than the minimum payment when you can. Paying down highest interest loans first will save you money on interest, perhaps allowing you to pay down other loans faster, such as your student loan.
Of course, budgeting to pay down a student loan doesn’t necessarily mean you must get rid of all non-essential expenses in your life — just try to ensure that they don’t deter you from pursuing your other financial goals.
If you’re fortunate to receive unexpected money such as a tax refund, bonus or monetary gift, it pays to apply all or some of it to reducing student loan debt. Again, the more you can pay off sooner, the sooner you’ll be out of debt.
Compounding can work heavily in your favor, especially if you are young and even if you are carrying student loans, says Siuty. By investing in a way that provides compounding returns, you may be able to overpower the losses you incur from student loan interest. So, you can potentially rid yourself of the student loan debt over time by putting your extra money to work through investments that provide returns.
FOR ILLUSTRATIVE PURPOSES ONLY.
There are a few rules many financial professionals will remind us of. Here are a few examples.
Start investing as early as you can to take advantage of the power of compounding. Put savings on autopilot by setting up automatic deposits into a 401k or IRA or both.
“When you’re starting out, you’re matching your lifestyle to your income,” Siuty says. “By setting habits early and ear-marking money to your 401k on a regular basis, you can adjust your lifestyle to your net income minus that 401k contribution. Set it and forget it. As your income goes up, you can adjust the contribution to the 401k higher so it rises as your income does.”
College graduation is an exciting time in your life, but it can feel a bit overwhelming, financially if not emotionally. But starting to develop those good habits early, such as putting savings on autopilot and letting the small savings add up, can help put you on the right track toward your goals.
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Financial Communications Society 2016
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