Pay Off Your Student Loans: The Ultimate Guide
Congratulations on graduating! Now that you've entered the adult world, it's time to take control of your financial life. Don't worry, we've got you covered.
In this comprehensive guide, we'll help you plan your student loan repayment while ensuring you still get to enjoy your life. By following these steps, you'll be able to navigate the world of student loans with confidence and reduce the stress associated with managing your finances.
Step 1: Determine your student loan payment
If you have private loans, your monthly payment may not be flexible. Contact your loan provider to obtain this information. However, if you have government loans, you may have various payment plan options. Remember, choosing a longer repayment period will increase your overall interest payments. Consider your income growth potential throughout your career and select a plan accordingly.
Step 2: Assess your overall expenses
Although it may seem daunting, budgeting is crucial when starting out. Start with estimations, as budgets can be adjusted over time. Let's consider some major expenses and make educated guesses for each:
Housing: If you're living at home, this expense may be zero. Otherwise, websites like Zillow or Apartments.com can provide insights into average rents in your desired area. Consider having roommates to reduce costs.
Utilities: Estimate around $150 for basic utilities, but account for additional expenses like cell phone bills or TV subscriptions.
Loan payments: Aside from student loans, factor in any potential car loan payments. Use online payment calculators to estimate this cost.
Insurance: Rental insurance and health insurance (if not provided by your employer) should be included. Research options and costs, and explore coverage under your parents' insurance or the healthcare exchange in your state.
Credit cards: If you rely on credit cards, plan your payments to avoid long-term balances and interest accrual.
Food: Start with a budget of $100-$150 per week for groceries. Monitor your spending habits and adjust as necessary.
Entertainment: Allocate funds for social activities and outings with friends. Calculate estimated expenses based on your preferences.
Personal care: Include expenses like gym memberships, salon visits, and regular appointments in your budget.
Travel: Make a guess on how much you’ll be traveling in the next 3-6 months, and calculate estimated hotels and transportation costs. Take that number and divide it by the number of months it covers to get to a monthly budget (e.g., if you plan on spending $1K in the next 6 months, that’s $166 per month).
Step 3: Calculate your take-home pay
If you have a job, refer to your pay stubs for your monthly take-home pay. Otherwise, estimate by dividing your annual salary by 12. Keep in mind that deductions for health insurance, retirement plans, and taxes will reduce your take-home pay. Calculate an approximate figure based on your employer's benefits package and tax rates. As an example, if your salary is $60,000, a conservative estimate is that you’ll receive 70% of your paycheck: $60K*0.7/12 = $3,500 a month in take-home pay.
Step 4: Analyze your budget
Use the following formula to assess your financial situation:
Take-home pay - Total expenses = Savings (Debt)
A positive value in the savings category indicates a healthy budget. However, if your expenses exceed your income, adjustments are necessary. Consider alternative housing options, public transportation, or cutting down on leisure activities. Determine your financial priorities and allocate funds accordingly, including savings for future goals like travel or homeownership. Additionally, prioritize building an emergency fund to cover unforeseen expenses.
Step 5: Build your rainy day fund (RDF)
Avoid falling into credit card debt by establishing an RDF. Aim for saving 3-6 months of take-home pay, approximately $10,500-$21,000 in the example from Step 3. Since most lenders allow a grace period of six months before requiring loan repayments, if you can, redirect those funds toward your savings during this time. This practice instills financial discipline and provides a head start on your emergency fund.
Step 6: Regularly review and adjust your budget
Since earlier steps involved estimations, it's important to revisit and revise your budget periodically. Consider this a guideline, not a plan that is set in stone. As your income grows and circumstances change, adjust your budget accordingly. Financial planning is an ongoing process, empowering you to stay on track towards paying off your loans.
Final Tip: Automate Your Savings
Direct deposit your paycheck into a savings account and schedule an auto-transfer to your checking account for your budgeted amount. By separating your savings upfront, you'll be less tempted to overspend. Align bill payments like rent or loans with your paycheck to maintain financial discipline (meaning you won’t spend money you don’t have).
Need some help or feeling overwhelmed? Habit Money and our team of financial coaches can help you put a plan together – and stick to it. Get started today!
