Paying off Debt or Saving? Life After College

Investing, Personal Finance, Retirement
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The Balancing Act

As of the beginning of 2020, the average American household had $137,063 in debt. This debt could be comprised of mortgages, car loans, student loans, credit card debt, etc. People will sometimes wonder which area they should focus on. Should they pay off certain loans, or should they start saving right away?

Student Loans & Debt

Every year colleges all over the country increase their tuition and other related costs. Typically, these costs will increase by double the inflation rate every year. This is primarily due to the increased demand for higher education among Americans. Millions of people apply annually, and they have to compete for a spot to get in. This means that colleges can charge premium tuition and students are forced to pay it.

Once a student has graduated, they have six months before interest will start accruing on their loan. College assistance is usually the first major loan that a person will take out. Correspondingly, it will be the first loan that negatively affects your credit if you do not make sufficient payments. Paying off a student loan as soon as possible will clear the way for future purchases such as a car and a house. Having student loans will be a detriment when applying for a mortgage, because the bank will see you as a form of financial liability. As soon as you have a job after college, paying off those loans should be your first priority.

Saving Money Post-College

After all the student loans have been paid off, that will be the time to save. Make a plan about what you want in your future, whether it be a house, vacations, or to retire early. At this point, at least 20% of your monthly salary should be going towards savings, preferably more if you are able.

When someone has saved enough for a down payment on a house, this is when they will have to carefully balance debt vs. savings. It is very near impossible to pay for a house at the get-go, so they will have to take out a mortgage. The mortgage should be paid off as soon as it is comfortably feasible, but do not go overboard and become house poor. Your payments towards your savings account should not be neglected under any circumstance. Not all your money should be put towards the mortgage, as 20% of your salary should still be going towards your savings. If you receive a bonus from work, for example, that is a lump sum that can go towards your mortgage to reduce your principal, and thereby reducing the amount of interest that has to be paid.

Using this method will keep you in control of your finances. It will also allow you to live a debt-free life to the best of your ability. Pay off short-term debt as soon as possible, as interest rates will tend to be the highest. Maintain a steady payment pace for your long-term debt, while still leaving enough money to put away for a rainy day.

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