Student loans help you pay for college, but once you're in the working world, you might decide it's time to start saving for your future. But how do you manage student loan repayment while also looking ahead to saving for big life purchases, like a new car or a home down payment?
Fortunately, rather than choosing to either pay off student loans or save, you can prioritize and budget to work toward both financial goals. Explore strategies for how to pay down student loans and build your savings at the same time.
How to budget for student loan payments while you save
Budgeting is an essential tool for balancing savings and debt payments. How you budget is up to you – there's no one-size-fits-all approach. Strategies range from general tracking of cash inflows and outflows to detailed spreadsheets that log every dollar you spend or save.
When choosing a budgeting strategy that works for you, it's helpful to consider your income stability, savings philosophy and any current concerns you may have about your finances. These three common approaches to budgeting may help you figure out whether to pay off student loans or save (or both):
Zero-based budgeting
If you're working within a tight spending margin, closely reviewing your expenses can help you avoid unexpected shortfalls at the end of the month. With zero-based budgeting strategies, you'll assign every dollar of income to a spending or saving category. By earmarking specific amounts for student loan payments and savings at the beginning of the month, you're less likely to spend the funds elsewhere.
50/30/20 rule
This simple, flexible budgeting method lets you keep an eye on your money without the hassle of a line-by-line analysis. Start by allotting 50% of your income toward necessities, 30% toward personal wants and 20% for savings. By using larger, generalized pools for spending and saving, you're free to shift funds among individual expenses when financial priorities change.
Pay-yourself-first
Set up a budget that makes savings and debt payments a priority, before your money gets spent elsewhere. Paired with automated savings transfers and scheduled loan payments, you can ensure you're taking care of critical budget categories before you spend on discretionary expenses.
No matter which budgeting method you choose, it's important to remain flexible. As time passes, you'll likely have changes to your earnings and spending. Don't forget to compare your actual spending and saving against your budget to make sure you're still achieving your desired results.
When prioritizing student loan payoff makes sense
In some situations, it's preferable to focus on paying off your student loans before increasing your savings:
- High-interest loans: If you're draining your cash flow by repaying student debt at a high interest rate every month, you can take steps to pay down or consolidate these loans before increasing your savings. Refinancing private student loans enables you to take advantage of lower interest rates as you pay off your debt.
- Stress relief: If paying off your loans helps ease your financial worries and simplifies your life with fewer monthly payments, it may make sense to work toward getting out of student loan debt before focusing on saving.
- Improved financial stability: You might discover that an aggressive payoff schedule will help your overall financial stability by improving your debt-to-income ratio. And once your loans are paid off, you can speed your progress toward other goals, like retirement savings.
When prioritizing savings makes sense
Likewise, in some scenarios, building your savings rather than paying extra toward your student loans is a more sensible option:
- Low-interest loans: If your outstanding student debt consists of low-interest rate loans with monthly payments you can easily manage within the confines of your budget, adding to your savings allows you to take advantage of potentially higher returns.
- Variable income: You may want to focus on savings if you're facing limited job security, income that varies from month to month or a lack of a financial cushion for unexpected emergencies. Aim for an emergency savings fund equal to about six months' worth of income to cover non-discretionary expenses like housing, food and medical costs.
- Large pending expenses: When planning for big life changes, such as a relocation or a home purchase, saving becomes more important so you have the cash reserves when you need them to finance larger purchases.
How to balance saving and student loan debt
Once you've established your budget priorities, it's time to determine the best course of action for saving and paying off debt.
- Split approach: You can aim for a split approach, setting aside a portion of your earnings for savings and dedicating another amount to paying down student loans. For example, if your income varies, you may want to employ a percentage-based budgeting strategy and earmark 10% of your cash flow for savings before making extra debt payments.
- Online banking and automation: Online banking and automated savings are two financial tools that can keep you on the path to success. Set up an automated account transfer to send money directly to savings after you get paid. This helps you stay committed to your savings plan. You can also sign up for auto debits or schedule online bill payments to ensure you pay your minimum student loan amounts on time each month.
- Make the most of windfalls: Make sure you use any cash windfalls, such as job bonuses or tax refunds, strategically. Divert the extra funds in a way that gives you the maximum bang for your buck and helps you achieve your financial goals.
Adjust your strategy as your income grows
Career progression, job changes and lucrative side gigs may increase your income over time. Rather than giving in to the temptation to increase your spending, remember to pause and revisit your original goals.
Are you still saving and strategizing to pay off student loans? As your income and investments grow, schedule periodic budget check-ins and make sure you're fine-tuning your savings and debt strategies, and accounting for interest rate changes.
Explore student loan refinancing options
The pressure of juggling student loan payments with new savings goals can be challenging, but making smart budgeting decisions can help you save while paying off debt. If you have private student loans, you may be eligible to refinance with lower interest rates and better payment terms. Explore your student loan refinancing options with Citizens.†