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Paying off Student Loans - What competes for your dollars?

Like many college graduates, you may now have student loans that are becoming due.

Knowing how to prioritize your payments and other savings can make a big difference to future success. 

It’s not unusual that there are many demands for the money you may have available.  Building emergency reserves, disability insurance, savings for future home purchase, saving for a wedding and funding retirement plans are just a few of the items that commonly compete for dollars as graduates consider how to pay down their student loans. 

Hopefully the student loan is the only debt that you have as you graduate.  If that’s not the case, all your debts should be reviewed collectively. 

We generally recommend putting any extra loan payments towards the loan with the highest interest rate.  But there may be reasons for a different plan of action depending on your individual circumstances. 

So, if you’re just getting started (or you have a child who is just getting started), there’s a lot to think about.

First, know your budget and stick to it.  Basically, live within your paycheck so that you can make better progress toward your goals.  Once you have a solid budget, what’s left?  This is the money you can use to build emergency savings, to fund disability insurance, to take advantage of company retirement plans and to pay off loans.

Now you must figure out how to prioritize.  Disability Insurance should be considered to protect your income.  Outside of this everyone should have emergency reserves to cover unexpected expenses or to cover brief periods of lost pay between jobs or if laid off.  Historically it was common to recommend 4 – 6 months of expenses as a good nest egg to cover the unexpected.  I think this is good initially when you are starting from scratch, but in the future, it may be important to increase this amount.  The economic and market events of 2008 put a strain on many people’s cash reserves and in many cases 4-6 months proved inadequate. 

It’s not uncommon for individuals to consider putting off retirement savings in lieu of reducing debt and building cash reserves.  There are several reasons this should be reconsidered.  First, saving something even if a small amount builds momentum and discipline towards retirement savings.  This can be very important to long term success.  Second, if the employer offers a match, this is free money - and can be an incredible immediate return on any money you save.  If possible, try to contribute enough to get your maximum employer match.  If that’s not possible, do your best and or use future raises to increase your contributions to gain that benefit in the future.

We recognize your first priority is to make your minimum required payment on your student loan.  After that, what’s left?  This is where some percent should go to disability insurance, building emergency savings (maybe more initially) and some percent should take advantage of company retirement plans.  The exact amount to each is a personal choice but always try to make sure you have enough or are building emergency reserves.  Know what your back up plan is if an unexpected event occurs.


We hope you find this info helpful.  If you or a family member would like further information, please contact us.  We are focused on your success and are “Focused on Your Tomorrows”.

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10713 B Birmingham Way
Woodstock, MD  21163
Phone: 410-995-8711

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