Look for lower interest rate credit cards
Talk to your student loan provider to discuss possible repayment options
Consider refinancing or consolidating loans to reduce interest payments
Like many young investors, you’re probably focused on meeting your day-to-day expenses and paying off student loans or other debt. And you may feel like there’s nothing left in your budget for anything else. However, it is possible to balance your current needs and future dreams. The first step is to create a plan that helps you manage and reduce expenses to free up money for your short- and long-term goals.
Here are some tips to help you get started:
Keeping Expenses in Check
There are numerous apps you can use to help track your spending. And once you know where your money’s going, you can figure out how much is left for savings. If it’s not as much as you would like, you might consider:
- Trimming expenses. For example, you might find another cell phone provider that offers the same services, but at a lower cost.
Making small changes to your discretionary spending. You don’t have to stop doing the things you enjoy, but cutting back could help your financial situation. Instead of eating out three times a week, you might make it a once-a-week treat. Or you could look for low-cost entertainment in your area, such as concerts in the park, festivals, and free museum days.
In either case, the money you save could be put towards your goals, perhaps a down payment on a house, a new car. or retirement. Once invested, these seemingly small dollar amounts could quickly add up. You might also consider setting up automatic deposits where the money goes directly to your savings so you won’t be tempted to use it for something else.
Paying Off Loans and Debt
On top of your expenses, you may also have student loans, and contrary to what you might think, this might not always be a bad thing. Making timely payments may boost your credit score, which is important when applying for a mortgage or purchasing a car. To help keep your payments on track and possibly free up cash, consider looking for ways to reduce the amount you owe or to make the payments more affordable, such as:
- Student loan interest deduction. If your modified adjusted gross income is $80,000 or less ($165,000 if married filing jointly), you may be able to deduct up to $2,500 of your student loan interest even if you don’t itemize. This could potentially lower your tax bill or increase your refund.
Loan consolidation or refinancing. Either option may lower your monthly payments and interest rate. But be sure to shop around, because terms and fees vary by lender. Income-driven repayment plans. These programs are for federal student loans, and your payment is based on your salary. However, smaller payments could mean you’ll potentially pay more in interest over time. Loan forgiveness programs. If you work in certain professions, like education, and meet the eligibility requirements, you may be able to have all or some of your federal loans forgiven. Extra payments. Paying a little more each month could make a big difference over time. For example, increasing the monthly payment on a $20,000 loan with 5% interest from $200 to $250 saves more than $1,500 in interest.
Keep in mind that not all of these options may be available depending on the type of loan (private or federal) and your financial situation. Contact your loan provider for more information.
In addition to student loans, you may also have credit card debt, a car loan, or a mortgage. To help manage these obligations, you may want to create a spreadsheet that lists the outstanding balances, monthly payments, and interest rates. This may help you prioritize your debts and decide the best approach for paying them off. Some ideas to consider include:
- Focusing on high-interest (8% or higher) debt first by making extra payments or paying more than the minimum amount.Paying off smaller obligations first and redirecting the money from these payments to your high-interest debt.Consolidating or refinancing your loans to lower the monthly payments or interest rates (remember, terms and fees may vary by lender).
Being a mindful spender isn’t always fun, but it can be rewarding. The experiences you put off today may allow you to enjoy greater experiences later in life. And the earlier you start investing the cost savings, the more time you’ll have for these smaller dollar amounts to potentially grow through compounding. In future “Money Smart” articles, we’ll look at different ways you can invest to build a portfolio that aligns with your goals.
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