You’ve Paid Off Your Student Loans. Now What?

Start an emergency fund, build your retirement account and pay down toxic debt after paying off your student loans.

Cecilia ClarkMay 22, 2020
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You’ve defeated student loan debt — congratulations!

Considering the average student debt payment is about $300 a month, you might be pleasantly surprised with the new wiggle room in your budget. That extra money might not be enough to fund all your money goals right now, but it can get you on the right track if used wisely.

Here’s how.

Start an emergency fund

Imagine not having to stress when life happens and bills pop up unexpectedly, like $800 for a broken radiator or $200 for a chipped tooth. Using your extra money to start an emergency fund can easily turn that “Oh, no” into “I got this.”

That peace of mind is a luxury most households don’t have.

Establish your emergency fund by putting a couple of previous payments in a separate savings account. Aim for at least $500 to start, but work to cover several months of living expenses. At that point you’ll want a cash management or high-yield savings account, where interest can help pad your account a little more.

Get free money from your job

Let’s say your job offered you $1,000 just because you work there, without having to do anything extra. It might feel like you won the lottery! Well, that’s basically what happens with 401(k) match plans.

If your employer’s 401(k) plan offers a match, use your newfound wealth to grab every cent of it. For example, your job matches 401(k) contributions up to 3%. That means your employer will contribute 3% of your salary to your retirement account if you also contribute 3%. If you make $50,000 a year, that’s $1,500 free, each year, from your job.

When you retire after 30 years earning 7% returns, you’ll have $153,000 in free money waiting for you.

Pay down toxic debt

Remember how good it felt to pay off your student loans? Imagine that same rush as you tackle your other debt, especially credit cards and other high interest accounts.

High interest debt — toxic debt — can make it harder to get ahead. You know your debt is toxic if the interest rates are so high that you end up paying two or three times what you borrowed.

Don’t get caught in that cycle of debt. Once you’ve got a safety net and a start on retirement, use your extra money to pay bad debt down faster.

Supercharge your retirement savings

Maybe you already have an emergency fund, a 401(k) and no toxic debt. If so, you’ve got a great opportunity to put that old student loan payment to work for your future.

A Roth IRA uses after-tax dollars to reward savers with tax-free growth. That may not sound like a big deal. But think of it this way:  Money you put in a Roth IRA has already been taxed, and you never pay taxes on it again.

So that $300 a month, saved every month in investments returning the historical average of 7% a year, becomes more than $500,000 when you retire — every nickel of it yours. And unlike other retirement accounts, you can withdraw your contributions (not your earnings) without penalty if you have to.

Over time, you’ll want to ramp up your contributions to the max allowed by law, currently $6,000 a year. The longer the money has time to work, the better off you’ll be.

Treat yourself

Paying off your student loans is a big accomplishment — don’t forget to celebrate!

It’s OK to splurge a little by spending one month’s student loan payment on something you’ve been holding back on. So don’t feel guilty about ordering dinner at the most expensive restaurant in town or buying those top-of-the-line headphones you always wanted. And once you have your financial house in order, you can budget for higher-ticket items you wouldn’t normally get — like a weekend spa getaway.

Indulging every now and then can keep you motivated. Just make sure to do it responsibly. Setting a budget for your immediate and long-term recreation will help keep you sane and on track with saving.

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