A popular conundrum I get asked a lot (like, every single week) is where to start when you’ve got two major problems going on at the same time. Usually, major debt & major lack of savings. I never know what the right answer to these actually are – in fact, I don’t think there IS one? – but I do know it’s always more helpful to hear from a bunch of people over one blogger with a crazy mohawk. So today, I need your help :) What would you write back if you got this email?
Here’s the situation:
I’m 24 and about to graduate with my Masters, which I went right in to after my undergrad. I went to a fancy private college for my undergrad, then moved back to home to go to a state school for grad school (wish I’d been smarter about the tuition the first time around!). I’ve got a job lined up after graduation which will let me stay living with my parents–the pay is good, the benefits are fine, and I’m hoping to use the money I save instead of living on my own to pay down some student debt.
But here’s the thing: two degrees later, my loans add up to almost $100K. It didn’t seem like a big deal when I was 18 and signing the paperwork, but everything added up and now I can’t even process the amount that I owe. One has a rate as high as 10% (gah!) while a few others are variable, so I’d love to start paying down while interest rates are low.
Part of me wants to make a strict live-off-Ramen budget and pay off as much as humanly possible right now. The other part of me realizes I also need to put money into a retirement account before other expenses (wedding, house, kids) come down the line in the future. The another part of me realizes that even if I put my whole salary into my loans, I’d still have 5 figures of debt!
So my plea for help has two parts:
1. What do I do first? Should I look into consolidating? How much of my income should I pile into my loans versus how much should I start saving for a rainy day?
2. How do I get myself into the right mental zone for this? I know I’m not expected to pay off my loans my first five years out, but I also know I don’t want to take advantage of the 30 year repayment plan they give me. How do I call myself down enough to find a pace somewhere between the tortoise and the hare?
My response back:
Woah! Yes, a game plan is def. needed to make ya feel better :) Although I’m quite impressed with both your degrees – congrats! That is nothing short of awesome. I’d take those over $100k or even $200k of debt any day, as you will forever have an edge over most others out there in the field. Which you’ll also be rewarded handsomely for!
As far as WHAT to do now, however, that’s a bit trickier. It’s always hard to help someone without knowing ’em, esp since I usually go with the emotional side to things over the financially smart method. For example, I’d personally rather have a lot of money in my savings account first before even thinking of paying off debt. Mainly because it makes me feel safer, but also because you then always have the option of USING that money to pay off your debt any day you please. If you go the other route and start knocking it out asap (which is financially smarter), it’s not like you can then “get it back” at any time, ya know? But again, that’s just me.
The best answer here, and probably the most boring, is to work on all things at the same time. Start paying off a little debt while also saving up and living your life as stress-free as possible. That latter part being the most important here (although easier said than done). Yes it sucks being in thousands of dollars of debt, but we also can’t let it ruin our day to day lives. So I think it’s first worth figuring out how much money you think you’d need in savings to feel comfy right now, and then at the same time how much you can put toward paying off your loans every month while still living normally. Unfortunately there’s no magical %’s here that fits everyone. (Which sucks, I know)
What would you all do, friends? How do you find a way to be OK with this?
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!