Should I pay off student loans or save money for the future? - CCCU
Friday, October 26 CCCUShould you save or pay off student loans?
Paying off student loans feels impossible to some, and just around the corner for others. No matter where you’re at in your journey, paying off your loans and investing in your future are integral parts of your financial health. Throughout this article, we’ll cover the five essential questions to ask yourself when you’re planning on reducing your student loan debt, as well as some helpful tips to ensure you’re setting yourself up for the future.
Questions to ask yourself when considering paying off student loans:
What’s your credit score?
If you’re still building your credit, making regular on-time payments towards your student loans can help you prepare for larger purchases by improving your credit score. If you’re thinking about buying a car, a home, or using a personal loan for any other purpose (like starting a business), slowly chipping away at your student loans can make a big difference.
Are you investing in your future?
While paying back your student loans is important, it often gets in the way of you saving for your future. Young people have time to let their money grow with compound interest through retirement accounts like 401(k)s, Roth IRAs , and investments. Take the time to see how much you could be earning in the future by speaking to a financial advisor and see whether it makes sense to be dumping extra cash into those accounts before you speed up paying off your student loans.
What’s your student loan interest rate?
If your student loan interest rate is lower than that of the typical return you get on investments, paying down student loans and neglecting your retirement means you’re getting a return that’s lower than that you would have made by investing, For instance, the past indicates that typically a 6-7% return on investments is fair, so if you have a student loan rate that’s lower, it’s safe to say it’s better for you to just make the minimum payments and stash the rest in an account that’s going to work for you in the future.
Do you have an emergency fund?
Recently, the Federal Reserve report showed that more than 41% of Americans wouldn’t be able to handle a $400 emergency without selling something or taking out a loan. Ensuring that you are adequately prepared for emergencies is an essential before you start trying to reduce debt more quickly. Typically, having between three and six months of living expenses is recommended. If you’re not able to do that, $1,000 is a good place to start to cover most unexpected costs.
Does your job offer 401(k) matching?
If so, that’s a guaranteed return on your dollars...even before the compound interest starts building over time. It’s important to remember the benefits of using these accounts, as you are literally leaving behind free money if you don’t use it. Taking advantage of these accounts is the fastest way to set yourself up for the future.
As you’re planning for your financial future, make sure that you’re considering all the factors.
Planning on buying a home, a car, or simply building up your retirement are all legitimate reasons to put off paying off your student loans early. As good as it may feel to start to reduce your debt, it’s equally important to ensure you’re making the best decisions for your current financial situation.