Student debt is kind of like a nagging cough -- it can linger and linger for much longer than you’d like it to. But if you’ve finally reached the point where you’ve paid off your student loans, you’re probably feeling giddy over the fact that you’ll soon have that much more money at your disposal each month. But before you make plans to blow that cash on a better apartment, travel, or general entertainment, here are a few smart things you can do with it instead.
1. Build an emergency fund
We all need savings to protect ourselves from life’s many unknown expenses, from car breakdowns to home repairs to medical bills. Specifically, you should have an emergency fund with enough money to cover three to six months of essential bills, so that if your savings account isn’t robust, the best thing you can do with your newly freed-up cash is stick it directly into the bank.
Should you aim for three months of living expenses, or push yourself to accumulate enough cash to cover six months’ worth? It really depends on what your expenses look like and how much wiggle room you have with them. For example, if you don’t own a home or car, you can probably get away with three months of expenses in the bank, but if you own a vehicle or property, the potential for repairs always exists -- in which case it pays to save more.
2. Start contributing to a retirement plan
If you’re fairly young, you may not be all that focused on retirement, but the sooner you start building a nest egg, the more opportunity you’ll give your long-term savings to grow. Once you have a fully loaded emergency fund, it pays to take the money you were formerly spending on student loan payments and instead use it to fund a retirement plan, whether it’s your employer’s 401(k) or an IRA.
If you’re not quite convinced that you need to save for retirement from an early age, consider this: Contributing $300 a month to an IRA or 401(k) over 35 years will give you an ending balance of $498,000 if you invest that money at an average yearly 7% return (which is a reasonable assumption, given that it’s a few percentage points below the stock market’s average). But if you wait 10 years to begin funding that account at $300 a month, you’ll end up with just $228,000 -- still a lot of money, but not nearly as much as roughly half a million dollars.
3. Put money away for a down payment on a home
Many people with student debt delay homeownership because they either can’t swing both a mortgage and monthly student loan payments, or their student loan payments make it impossible to save for a down payment. If you’re eager to become a homeowner, the money you formerly spent on loan payments could instead be put into a high-yield savings account or short-term certificate of deposit for maximum risk-free growth. That way, it’ll earn some interest, but you won’t run the risk of losing principal like you would if you were to invest in stocks or bonds.
4. Invest in your career
When a large chunk of your income is eaten up by student loan payments, it’s hard to justify spending money on things like better tools for your job or courses to grow your skills (even though both are valid ways to spend your cash). But now that you’re loan-free, you can take some, or all, of that money, and use it to invest in yourself. You can buy that upgraded laptop that helps you work faster, or you can pay to get certified in your field for added job security and more upward mobility. You can even spend some money on a career counselor if you feel like you need guidance about your next steps.
Paying off your student debt is a milestone worth celebrating. Just be sure to use that newfound cash wisely now that it’s available to you.