Dear Carrie: I am relatively new to investing. I have set money aside and plan to take an aggressive approach to paying off my student loans. Can you offer an ideal action plan for both investing and lowering student debt? --A Reader
Dear Reader: With money set aside and wanting to put a plan in action, it sounds like you're already headed in the right direction. Now it's time to get down to specifics so that, ideally, you can accomplish both your investing and debt lowering goals -- and then some.
Student debt can be daunting, and you're right to make it an important economic focus. But student loans are generally low interest and don't appear as a black mark on your credit rating as long as you never miss a payment. So rather than making paying off your loans your primary goal, I'd make it part of a bigger picture in which you take care of current needs as well as plan for the future. Here's what I suggest.
SET A MONTHLY SAVINGS GOAL
It's great that you already have money set aside. But don't stop there. The key to staying on top of your finances is to make saving as much a part of your monthly budget as paying your bills. Take a look at your current expenses and make saving a line item. Don't think of it as an extra, think of it as a necessary payment to yourself. And be as generous as you can -- because how much you regularly save is fundamental to your financial success.
COVER YOURSELF IN CASE OF EMERGENCY
The first place for your savings is in an emergency fund. You should try to keep at least three to six months living expenses in an easily accessible account like a savings or money market account. With this money tucked away, you'll be better able to cover your bills (and your student loan payments!) in case of a job loss or unexpected illness.
PUT YOUR EMPLOYER TO WORK FOR YOU
If you work for a company that has a retirement plan such as a 401(k), contribute enough to get any company match. Since the money is pre-tax and comes directly out of your paycheck, it's an effortless way to begin to save for retirement -- and the company match is extra money without having to lift a finger.
CONSIDER CONSOLIDATING YOUR STUDENT LOANS
President Obama's new "Pay As You Earn" plan, introduced in October 2011, included making it easier for recent graduates to consolidate their federal loans and achieve lower interest rates. If you have federal loans, check to see if this might benefit you. You can also look into consolidating private loans, but understand that you can't combine federal and private loans into one. Whatever your situation, it's worth considering -- both to save money and to also make it easier to manage your payments.
In financial terms, student loans are often considered "good debt," sort of like a mortgage (and unlike credit cards!). So while it's great to be rid of student debt, you don't need to rush to pay it off. Just make regular, on-time payments while you get the rest of your financial house in order. However, timing is crucial because a late payment (SET ITAL) will (END ITAL) be a ding on your credit rating.
Of course, you can always accelerate your payments if you find yourself with extra money in your pocket. If you do, pay down your higher interest, adjustable rate loans first. You can think of it as a risk-free rate of return. For example, if you're paying 7 percent interest on your student loan, paying it off is the same as earning 7 percent on an alternative use of the money. Even in the best of times, a risk-free 7 percent rate of return is hard to beat. These days, it's a no-brainer.
TAKE A LONG-TERM APPROACH TO INVESTING
Now with all of the above in place, you can think about investing. In volatile times like these, your age is your best advantage. Investment choices depend largely on your time frame and feelings about risk. Generally speaking, you can take more risk with money you won't need for many years, so with a long time horizon, stocks still offer the best opportunity for growth. You might begin with something like a broad-based stock mutual fund or ETF. But before you start, take some time to learn the basics of asset allocation and diversification. These are still the building blocks of smart investing, though they cannot eliminate the risk of investment losses.
Your question was a great first step in tackling your financial challenges. Now you have an even greater opportunity to take action. The steps I've outlined may not seem dramatic in themselves but, believe me, when you put them all together they can add up to significant results. Best of luck.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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