While student loan payments are suspended, do these things with the extra money
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It’s official: US President Joe Biden has removed student loans from the $ 6 trillion budget proposal he presented last week.
Meanwhile, payments for all federal student loans are due again at the end of September. Experts say now is the time to hold your breath to ease student loans and instead focus on getting your finances in order.
“I haven’t promised the Americans any student loan forgiveness, and I don’t see any extension of the grace period. The economy is recovering, things are normalizing and everything is opening up again, ”said Robert Farrington, founder and CEO of The College Investor, a website that offers student loan advice.
When you have a government student loan, you have a few more months to decide what to do with the extra money left over from failing to make payments. “You shouldn’t give the government extra money that isn’t being asked of you, especially now in place of talking about lending,” Farrington says.
This is an opportunity to change priorities, says Farnoosh Torabi, financial journalist and editor at NextAdvisor. “When you have tens of thousands or more of federal student loan debt and other financial gaps to fill – like paying back credit card debt with higher interest rates, adding to your savings, or contributing to your retirement plan – smart money, I say, is looking at these areas first focus, ”wrote Torabi in a recent NextAdvisor column.
While student loan payments are still on hold, here are a few things you can do to improve your financial situation.
Make a budget
First, get organized and put all your finances on the table. Tax season is over; Summer is usually a great time to take a few minutes and take care of your finances. Understand what you owe and what is yours, and start making a budget. If you’re not sure how to go about it, we’ve got tips on how to budget.
“Then you can make some decisions about where to put additional priorities,” says Farrington.
Pay off high-interest debt
Now is a good time to pay off other types of debt that you may have, particularly high-interest debt.
“I would start at the top of the list with non-paused student loans, and then I would probably go to credit cards and personal loans, any kind of unsecured debt like this, and try to get rid of them,” Farrington says. “Then see where else you can make a difference, maybe get a car loan or start building an emergency fund.”
You want to put together an amortization plan to get your debt paid off as quickly and efficiently as possible. Now that you’ve worked through your budget, there are two of the most popular withdrawal strategies you should consider: the debt snowball or the debt avalanche.
With the debt snowball method, minimum payments are made for all debts except the account with the lowest balance. If you are following the debt avalanche method, focus on the account with the highest APR or APR first. The debt avalanche method saves you the most money because it gets rid of higher-interest debt first.
Build your emergency fund
The COVID-19 pandemic showed us the importance of having an emergency fund at hand at all times, so if you haven’t already, you should start building an emergency fund as soon as possible.
“Now, given the unpredictability of the past year, I recommend starting with an emergency savings fund for people who can save money,” said Jessica Ferastoaru, student loan advisor at Take Charge America, a national not-for-profit loan company. and student loan advisory agency. “I think it is a smart move to set up or expand an emergency fund to prepare for a possible job loss or an income cut.”
As for the size of your emergency fund, the standard recommendation is three to six months of spending. But Farrington says the amount you save in your emergency fund is ultimately a personal decision. “My philosophy is that anything is better than nothing,” says Farrington. “I think $ 1,000 is a good place to start.”
Ferastoaru recommends that saving should now be given priority over debt repayment. “Paying off debt is always a wise financial decision, but it’s so unusual for student loans to earn 0% interest over such a long period,” she says.
Save for retirement
When you have an emergency fund in place, your debts are stabilized, and you are following a budget, your focus should be on saving for retirement.
Financial experts agree that the best way to build wealth and plan for retirement is to invest. You need to find a way to regularly deposit part of your paycheck every month, and the easiest place to start is with a retirement account, such as a retirement account. B. a 401 (k) through an employer or an individual retirement account (IRA).
Assuming you can meet your basic needs, use any extra money you have to keep your contributions constant or possibly to increase them.
Start saving for important life events
Take a look at what your goals are for the next few years. It could be saving for a down payment on a home, saving for your child’s college, or investing for retirement. Whatever it is, you can now start putting money on it in a high yield savings account or CD while the student loan payments are on hold.