Paying Off Student Debt vs. Saving Your Money: 5 Steps to Finding a Balance

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pay off debt or invest?New graduates have a lot on their plates. Beyond figuring out where to live and work, there is a dark cloud constantly looming overhead in the form of student debt. With the average student loan debt for 2012 graduates hovering at $29,400—approximately a 24 percent increase from just four years prior—paying back your student loans may seem like the most important post-graduation goal. But what about putting money aside for your future? The good news: You can do both. While the right plan of action varies for each person, here are five steps to take in order to find the right balance between paying back and thinking forward.

1. Pay the Minimum

When it comes time to pay your student loans, budget at least the minimum monthly amount on each one. Any missed payments can result in fees, additional interest, and a lower credit score. Reevaluate your minimum monthly payments with every wage increase you receive at work.

2. Get Your 401(k) Match

Many companies offer a 401(k) plan and will match a certain amount of your contribution. If your company has a match plan in place, take advantage of it. This is essentially free money that will give you a great head start on saving for retirement. Paying off your student loans is important, but so is saving for retirement.

3. Start an Emergency Fund

Life throws you curve balls. Job loss and injury can prevent you from earning an income, and being able to cover expenses (like your monthly loan payments) without going into further debt is important. A good rule of thumb is to have enough money to cover at least three months worth of expenses saved up. These funds should be kept in a savings account that is easily accessible if needed.

4. Eliminate Debt With the Highest Interest

After prioritizing the first three steps, any extra money should go toward your loans according to interest rates. It’s strategic to pay off the loan with the highest interest rate first, then the second highest, and so forth. This cost-effective method will allow you to pay off debt while accruing the least amount of interest. For example: A $10,000 loan with a $100 monthly minimum and a 6 percent interest rate will cost you and extra $3,897.58 in interest. A similar loan with at 3 percent interest will cost $1,521.68 in interest. Utilize free online loan calculators, such as Unbury.me, to stay organized and prioritized.

5. Start Investing

If you’ve paid off all, or most, of your loans and built up a healthy amount of savings, it’s time to start thinking about investing. There are many options in terms of where to put your money, and your choice will most likely depend on when you’ll need to access the funds. For instance, if you’ll need money in a few years, a certificate of deposit, or CD, is a great option. A CD allows you to put money away for a certain time period (usually one, three, or five years) and accrue interest at a rate that is usually higher than most traditional savings accounts.

Paying off student debt is important, but putting money aside should also be a priority. Following these five steps will help you to map out a financial plan that simultaneously allows you to stay ahead of debt and prepare for the future.