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Got financial questions? We’ve got the answers. Every Monday, we’ll address one of your key money-related queries by consulting a panel of finance experts for their insights. If you have a general financial question, a money-related concern, or just want to discuss something related to PeFi, feel free to leave a comment or reach out via email at [email protected].
This week’s question comes from I never remember my burner name, though it’s a question asked often:
What’s the best approach to managing student loan debt while also setting aside money to save & invest?
Here’s what various financial experts generally recommend on an issue that affects everyone differently—however, for tailored advice, it’s always a good idea to consult a financial planner.
Concentrate on One Objective at a Time
Balancing debt and investing can be challenging. To make sure your money is working as efficiently as possible, prioritize these actions in this order:
Always pay your debt on time: First and foremost, it’s essential to prioritize making at least the minimum payments on time. Missing payments can result in penalties, added interest, and higher finance charges, along with damaging your credit score.
Maximize your employer-sponsored retirement plan: Check if your employer matches contributions to retirement plans like a 401(k). If so, take full advantage of this free money by signing up and contributing to the plan.
Pay down high-interest debt: Once you’re keeping up with timely bill payments and taking advantage of matched retirement plan contributions, focus on paying off debt with interest rates higher than 5%. For most people, the most expensive debt is unsubsidized loans or credit card debt. [*Ed note: Steps 1-3 can be completed simultaneously.]
Build an emergency fund: After clearing high-interest debt, begin building an emergency fund for unexpected expenses. It’s recommended to save enough to cover three to six months’ worth of living expenses, including housing, bills, utilities, and recurring costs.
Start saving for retirement: With high-interest debt paid off and a solid emergency fund in place, you’re now ready to focus on long-term investment. By the time you turn 59½, or when you’re eligible to withdraw from your 401(k) without penalty, you may find that the match alone won’t be enough for a comfortable retirement. It’s essential to start saving early for retirement.
While it may not be possible to make your loans vanish instantly, with a strategic approach, you can pay them off faster than you expected—and even save money along the way.
Include your minimum monthly payment in your budget: If your loan payment is nearly $1,000 a month, you’ll likely need to cut back on some non-essential expenses to accommodate this payment.
Utilize windfalls effectively: Accelerate your loan payoff by putting any extra money you receive, such as a tax refund or work bonus, directly toward your loans.
Consider refinancing: If you qualify, refinancing your loans can help lower interest rates, reduce your monthly payments, or shorten the term of your loan. This will save you money on interest over the long term.
— Nick Holeman, CFP at Betterment
It’s Not Always an All-or-Nothing Situation
Don’t fall into the trap of thinking you have to choose between paying off debt and investing. Look at your student loan payments. What if you reduced that payment by 25% and invested the remaining amount? You’d still be putting 75% of your extra payment towards the debt, but now you’re also securing your future through investing.
Check with your employer to see if they offer a retirement plan. If they provide a match, make sure to take full advantage. Not only will it help with your retirement savings, but it’s essentially free money. If it means shifting a small portion of your extra student loan payment to grab that free match, it will pay off in the long term—more than the interest you’d be paying on your loan.
-Miranda Marquit, Financial Expert at Student Loan Hero
You Need to Create a Budget
Set up a budget that includes both your monthly debt payments and your savings contributions (whether to a savings account or investments). Track your spending on a daily, weekly, or monthly basis. Any leftover funds should be directed towards paying down debt and adding to your savings and investments.
Develop a debt repayment plan with columns for the total debt owed, overdue amounts, due dates, and interest rates for each account. Use an app, software, or even paper to track your debt payments. Set up reminders on your phone, calendar, or planner to make timely payments, and allocate funds toward both debt reduction and savings. Set a goal date to pay off each debt and use a debt payoff calculator to determine when each balance will be cleared.
Decide on the repayment method that suits you best:
Debt Snowball: Start by paying off the smallest debt first, then use the money from that payment to tackle the next smallest debt (debt snowball method), accelerating your progress.
Debt Avalanche: Focus on paying off the debt with the highest interest rate first.
Minimum Payments Only: Make only the minimum payments required for each debt.
Start by covering your basic needs first, and then prioritize paying lower priority bills:
High Priority: Rent or mortgage, utilities, car payments, legal debts (child support, alimony, taxes).
Medium Priority: Insurance, student loans, judgments, collection accounts.
Low Priority: Internet, phone, cable, credit card payments, and other similar expenses.
Reach out to your creditors to inquire about repayment programs or to negotiate a payment plan. You can offer a good faith payment or a lump sum in exchange for waiving any fees or finance charges.
Make consistent contributions to both your savings and investment accounts. Set up automatic contributions for savings and investing. Aim to save at least 1% of your monthly income (ideally 10% to 20%). While paying off debt is important, you’ll risk going back into debt if you don’t build up any savings.
—Harrine Freeman, CEO/Owner of H.E. Freeman Enterprises
Safety Net > Paying Off Loans
An emergency fund is absolutely essential. Securing your financial future is crucial, and it's a key part of the balance between tackling student debt and saving. Both strategies help grow your net worth, but there’s something to be said about the peace of mind that comes with having liquid cash available. That’s why establishing an emergency fund is a prerequisite before aggressively focusing on paying off student loans.
When dealing with federal student loans, you have a variety of options like income-driven repayment or deferment. However, these protections don’t apply to other types of debt or life situations, so it’s important to save your own safety net: your emergency fund.
Aim to set aside at least one month’s worth of expenses as an emergency fund, and consider saving up to three months’ worth. Once that goal is reached, you can reassess your financial objectives and determine which one to tackle next.
-Elyssa Kirkham, Student Loan Expert at Student Loan Hero
*Responses have been edited for clarity.
