Getting out from under student loans is a huge relief. Whether you’ve repaid them in full or had them forgiven, the end result is the same — freed-up cash and wiggle room in your budget. What you do with those extra funds can have a significant impact on your finances, now and in the future.
After years of living frugally, the urge to spend more freely can be quite powerful, but it can get out of hand if you’re not careful. “Lifestyle creep” — using your increased discretionary income to improve your standard of living — can leave you as bad off, or even worse off, than you were while you still had loans to pay.
“To prioritize those extra funds, look at necessities, such as housing, groceries, transportation and education,” said Stacey MacPhetres, student loan expert senior director of education finance at EdAssist Solutions. “Recognize how extra money in your pocket can better yourself and your family.”
To help you make good use of your extra cash, GOBankingRates asked personal finance experts to weigh in on the best money moves to make once student loan payments are a thing of the past.
Reassess Your Budget
Hitting a financial milestone like eliminating student loan debt presents a good opportunity to reassess your budget to make sure you’re spending and saving wisely, said Brittney Castro, a certified financial planner at Mint. “The 50/20/30 rule can help you estimate how to allocate your money — 50% on needs, like food or rent, 30% on non-essential[s] and 20% on savings.”
Castro recommends using an app like Mint to create custom budgets and set goals, then track your essential spending month over month to make adjustments as needed. “We should all be updating, editing and reviewing our budgets on a regular basis to ensure our money is working for us,” she said.
Set Financial Intentions
The goal of setting financial intentions is to be clear about exactly what you want for yourself in all areas of your life — love, work, money, spirituality, health and relationships, for example — and be more holistic by defining how you will feel once you have reached your goal with these areas.
“From there, you can map out the daily and weekly actions you need to do in order to achieve this,” Castro said. “It becomes more about creating yourself to become the person to achieve your intentions and making lifestyle changes versus feeling pressure to be perfect and restrict everything that is fun out of your life to reach your goals.”
Alissa Krasner Maizes, J.D., financial planner and founder of Amplify My Wealth, agrees. “Celebrate your accomplishment by making sure you set yourself up for the financial success you deserve,” she said. “Rather than reallocating the monthly payments to discretionary spending, be intentional by creating a financial plan that aligns with your goals and the financial journey you want to take.”
Pay Down Other Debts
If you have credit card debt or other non-mortgage debt, consider using some of your freed-up money to pay it down.
Paying down debt can help you prevent a financial crisis and give you more financial flexibility, said Julie Rains, writer and publisher at Investing to Thrive.
“The fewer obligations you have with your finances and the more cash you have, the more you can avoid problems — like not having enough money or credit to pay for an unexpected medical expense or large car repair bill — and take advantage of opportunities, such as putting down a deposit on a new apartment so you can accept a new job in a new city,” she said.
As for which debt to tackle first, if you have more than one loan or debt, paying down the account with the highest interest rate first is a great strategy to consider, according to Castro. “The higher the interest rate on the loan or debt, the more it costs you over time.”
If quick results motivate you more than long-term savings, the debt snowball method might be a good alternative. This strategy, devised by personal finance personality Dave Ramsey, helps you build momentum by paying off small balances first. Once you’ve eliminated the smallest debt, you put the payment amount toward repaying the next-smallest balance. Your payment amount grows each time you pay off an account, which accelerates each subsequent payoff.
Build Up an Emergency Fund
Once you’ve paid down non-mortgage debt, your next priority should be your emergency savings. Emergency savings are your safety net for unexpected expenses you can’t afford to pay for with your regular earnings — or, in the case of job loss or a health crisis that keeps you from working, to tide you over until you’ve returned to work.
Michael J. Garry, certified financial planner and author of The Smart Person’s Guide to Financial Planning & Investments: A Simple and Straightforward Approach to Understanding Your Personal Finances, recommends socking away three to six months’ worth of living expenses in an FDIC-insured online account — online accounts often earn the most competitive rates.
The idea of saving that much money can be daunting, but it’s not an all-or-nothing deal. Start with an initial goal of saving three months’ of expenses, and once you reach that, make six months your new goal. “Realize it’s going to take some time for most people,” Garry said. “And that’s OK.”
Save for Retirement
If you have paid down debts and have a sufficient emergency fund, prioritize saving for the long term.
“As long as you currently have earned income, you can open a Roth IRA and save the lesser of 100% of your earned income or $6,000 ($7,000 if you’re over age 50) year over year. Since you’re saving to a Roth IRA, these funds are considered ‘after-tax’ retirement savings, meaning that you can extract all principal and earnings 100% tax-free once you’re over 59 ½.”
Although you may not feel the need to prioritize saving for retirement just yet, getting started early is key. Thanks to the effects of compound interest, “someone who saves the same amount monthly from age 20 to age 30 will have more saved at 50 than someone who saved the same amount from age 30 to age 50, as long as the return rate is mildly positive — even though they saved half as much,” Garry said.
As your income grows, so should your retirement savings. “If you get a raise,” Garry advised, “allocate ½ of it to increased savings, and the rest can go to keep up with inflation and pay the extra taxes.”
Make Inflation-Fighting Investments
Escalating inflation reduces your money’s earning power. To offset the effects on your finances, invest in assets that do well amid rising inflation.
“To fight back against the current rate of inflation, I would focus on investing in TIPS or I-Bonds,” said Bob Lotich, certified educator in personal finance and founder of SeedTime.com.
TIPS, which is an acronym for Treasury Inflation-Protected Securities, are a type of bond with a principal that adjusts up and down as inflation rises and falls. Twice a year, the bond pays a fixed rate of interest on the adjusted principle. Once the bond matures, you receive the original principal or the adjusted principal, whichever is higher.
I-bonds, or Series I savings bonds, are another government-backed security that serves as a hedge against inflation. The current initial rate for a new I-bond, in effect for bond purchases through October, is 9.62%.
As long as you’re on track with your other goals, you should aim to invest however much you used to owe in monthly student loan payments.
“Take the exact amount you had previously been paying to service your student debt, and keep making those payments annually, except into an investment vehicle that takes advantage of the principle of compounding returns,” said Bobby Matson, CEO of Payitoff. If your student loan payment was $400 and you invest that same amount of money each month in the stock market — in a S&P 500 index fund, for example — in 30 years you’ll have a portfolio worth $1,121,808 — as long as you continue to reinvest your gains and the market continues similar performance over the next 30 years as it has over the past 100[removed quotation marks, edited comment slightly], according to Matson.
“That’s a pretty powerful thing to grasp — $400 a month ultimately makes you a millionaire,” Matson said.
More From GOBankingRates
- 6 Ways To Tell If You're Middle Class or Upper Middle Class
- If You Find a Rare 'Doubled Die' Penny, It Could Be Worth $1.14 Million
- 3 Ways to Recession Proof Your Retirement
- Here's How To Build a 6-Month Emergency Fund