I’m 27 years old, I just graduated from law school, having received about 175,000 dollars in student loans. I have a good job, but I am torn between work to repay these loans quickly, or focus on financial decisions related to creating equity instruments, such as saving on a down payment. Where should I distribute my discretionary income? – Paul
Paul is not alone, trying to figure out how to balance the payment of student loans, creating wealth and saving other important goals. Although not all look at debts in the amount of $ 175,000, many young people are trying to figure out how to invest in their future without drowning in student loans.
But the debt – even in six figures – should not prevent you from following your financial dreams.
Do not skimp on your daily fund
Before you start thinking about how to build equity or buy a house, make sure that you have savings. Experts recommend having enough money saved to cover expenses for three to six months before making any other financial decisions.
It is extremely important to make sure that you put something in time on the savings account if you lose your job or get into unforeseen expenses, such as an expensive medical bill or car repairs. While it is not recommended to skip payments on student loans, you must hide any money above the minimum payments until you reach your goal of saving in emergencies.
Find out what is important to you
The next thing is to save extra money so that they work for you. But what you do with it depends entirely on you. Some borrowers do not like the idea of moving a debt for a long time. Others want to move forward with different goals. The trick is to identify, quantify the priorities for your personal goals.
If Paul is intimidated by the idea of stretching his debt for decades, he may want to press a pause on his plan to buy a house and throw all of his extra cash to the loans. But if becoming a homeowner becomes more urgent, he will most likely be forced to refuse to pay his student loans and prepare for debt.
Take a look at your interest rates
Where you need to focus all your attention when assessing your loans, depends a lot on your interest rates. High interest loans must be repaid as soon as possible. But if the rates are low enough so that you can invest better, say, 7% or less, you can simply continue to pay them when investing in other places.
When it comes to paying off several loans, a good rule of thumb is to focus on paying those with the highest interest rates.
In addition to this, think strategically about the loans that you need to pay – consider refinancing. If you are sure that in the next few years you will continue to earn at a high level, you can now increase your payments to reduce interest expenses in the long term.
If loans are federal, you can claim a state loan, a government program that can erase student debt in ten years. To qualify, you must work for a government or non-profit organization. But it is worth noting that the program will be reduced in accordance with the proposed budget of President Trump.
Divide and rule
Make sure that you have taken care of all the significant expenses, first of all it is rent, utilities and minimum payments on loans. But once you have paid these basic necessities, your money will be saved. You need to decide how much extra money you can get on loans, instead of saving on the house or even on vacation, at a wedding or for any other purpose in life that you want to reach.
If Paul wants to start building capital now, experts recommend that he continue to repel his debt, while maintaining an advance payment. We would advise him to allocate 50% of monthly savings to pay off his debt. Adding additional, even small payments each month, it can significantly speed up the payment of debt.
By reducing his debt, he will qualify for a higher mortgage loan – which will help him to be closer to buying a home.
Before making a decision, always consider all the costs of becoming a homeowner.
If the savings for the house seem insurmountable, you can always rent for several years and review the plan later.