So, you just graduated from college, you accumulated some student debt over those four years, you managed to score a good job, and you have an eye on your future. So, what do you do now? First of all, asking the question puts you miles ahead of so many of your peers. There are seemingly an infinite number of ways that your paycheck can get spent, but if you follow a few simple rules, you can prioritize those dollars now so they can really benefit you in the future.
To pay down student debt or not to pay down student debt?
If you went to college, chances are really good that you have some student debt. According to The Institute for College Access & Success (TICAS), 69% of 2016 bachelor’s degree recipients graduated with an average debt of $28,950 (https://ticas.org/posd/home). Starting off in the hole close to $30k is daunting, and managing the monthly payments while still trying to feed, house, and clothe yourself, as well as start saving, can seem like an impossibility.
Let’s be clear, MAKE YOUR MINIMUM MONTHLY STUDENT DEBT PAYMENTS!!!! Do not allow missed payments to trigger penalties and negatively impact your credit score (for more on credit scores read our blog post Know Your Credit Score, Review Your Credit Report)
Start saving a small amount earlier to avoid needing to save a large amount later
Along with the minimum debt payments, set aside a minimum of $100 per month in savings into a tax deferred investment account. This can be accomplished in your company’s 401k, or by opening your own IRA or Roth IRA. If you start early, the amount you need to save is small, but through the power of compounding, the impact on your retirement can be enormous!
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Leverage additional free cash to knock out debt faster
After essential living expenses, student debt payments, and saving, if you have additional flexibility in your budget, consider putting more money toward your debts so you can pay them down faster. Many people will tell you to start with the highest interest rate debt first, and that makes sense if you are deciding between a 20% rate on credit card debt versus 4-6% on student debt.
But if you’re making the decision between relatively similar interest rate debts, try putting excess funds toward the smaller debt so you can pay that debt off faster. Once you payoff that debt, take the total amount you were paying toward the smaller debt and simply roll that into the next largest debt. This will allow you to more quickly see success as debts are wiped away.
The goal should be to eliminate all monthly payments outside of housing. Commit to a time frame that works for you and stay on budget. We all know that unexpected expenses will always pop up, but the more quickly you can get back to paying down your debt, the better off you will be.
If you’re interested in a few other tips on how you can turn your early savings into your first million dollars, you might be interested in our report Five Ways to Accumulate Your First Million which you can download by clicking on the image below
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