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For those fresh out of college and newer to the workforce, it can be challenging to figure out how to balance between managing looming student loan debt and saving for your future.
Student loans are a particularly burdensome source of debt, totaling $1.63 trillion — or $37,600 per borrower — in the United States, according to a recent WalletHub study. They’re the second-highest form of debt for Americans, second only to home mortgages. And after a three-year pause, federal student loans will resume accruing interest on Sept. 1, with payments coming due in October.
You may have heard of the 50-30-20 rule — dedicating 50% of your money toward needs, 30% toward wants and 20% toward savings — but there is more to post-college budgeting, Chris Briscoe, vice president and director of financial planning at Girard Advisory Services, tells CNBC Make It.
While there is no one-size-fits-all approach, especially for Gen Zers and millennials burdened with student debt, here are a few steps young professionals can take to start balancing loans and future savings.
1. ‘Take your time’ and establish your financial goals
Putting together a plan for financial success right out of college is not an easy or quick task, Briscoe says. College graduates do not have to find the perfect job right off the bat, nor should they feel the pressure to immediately know how to handle their money.
“You don’t have to take care of this all at once. Take your time,” he says.
Start by establishing a preliminary budget and outlining financial goals. There are a few simple questions you can ask yourself in this process, Briscoe says.
“[The budget] doesn’t have to be set in stone, but at least take some time to figure it out a few months after you get used to making money. What fixed expenses do you have? What do you like to do? What would you like to do for enjoyment? How much money is going in? How much money is going out?”
Additionally, “write down your goals. Where do you want to be in one year? Where do you want to be in five? Where do you want to be in 10 years? If you have debt, how do you want to tackle that debt?”
2. Always make the minimum payment
For those grappling with student loan debt, the most important thing is to stay on top of your minimum monthly payments, Andrew Meadows, senior VP of HR, brand and culture at Ubiquity Retirement and Savings, tells CNBC Make It.
“It costs money to owe money. It is a funny thing to say, but that’s the truth,” he says. “In order to not have that debt grow, continue to make the minimum payments.”
That’s because “if you get late on your payments, they add late charges on top of that,” he says. “The last thing you want when you’re facing debt is to face more debt.”
Ultimately, the sooner you can pay off your student debt — by making minimum payments and paying a little more each month if you can — the less you will pay overall.
3. Start building a savings buffer
While it might be difficult to immediately set aside a full emergency savings fund of three to six months’ worth of expenses soon after entering the professional world, at least build a cash savings buffer, Meadows says.
“Start taking a little bit of money away that will cover two months’ worth of your student loan debt and a couple of months’ rent,” he says. “This isn’t a full emergency savings. It’s just that buffer so that you have some breathing room and you can lower your anxiety overall.”
Some jobs are not forever, he reminds young professionals. It’s important to prepare while you can and have enough money to get yourself through periods without steady pay.
4. ‘It is never too early to save for retirement’
If you have a savings buffer and are making your minimum loan payments, it’s time to start putting money away for the future.
If given the opportunity, opt for a job that offers an employer-sponsored 401(k) plan, Meadows says. “It is never too early to save for retirement.”
For working professionals, 401(k) retirement plans allow your money to grow tax-free, offer you an upfront tax break and can include employer matching. If your company offers a match, save at least that amount every month, Briscoe says. It’s part of your compensation, and basically “free” money.
If your company does not offer a 401(k), a Roth IRA might be a strong alternative. Roth IRAs are funded with post-tax funds, which you can withdraw tax-free in retirement, provided you meet all the requirements. They’re often recommended for early career investors because you’re more likely to be in a lower tax bracket early on than in retirement.
5. Maintain your ‘study mindset’ and continue to learn
When it comes to gaining greater financial literacy and learning how to effectively balance student loans and retirement savings, it is essential to learn all that you can.
“Be a sponge,” Briscoe says. “If you’re at your job and you have questions about your retirement plan, make sure you’re asking somebody that might be a little bit more experienced about what they’ve done.”
Recent college graduates should maintain their “study mindset,” Meadows says, and devote time to building their budget and financial resources. It shouldn’t feel like a burden — rather, it’s a chance to maximize your postgraduate experiences.
“Your retirement plan is the ultimate DIY project,” Meadows says. “You can’t rely on Social Security as your primary form of income when you retire. Many of us are not going to have jobs that provide pensions. The only thing you have left is your own personal savings.”
“You are working hard now, you’re out there making a living. But don’t forget to treat yourself a little bit,” he adds. “Just understand what your boundaries are so that you can be setting up your future self for the most comfort possible in retirement.”
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