If you’ve been laid off, but you were working with your previous employer for number of years, you probably accumulated a good chunk of money in your employer-sponsored retirement plan. And hopefully, you’ve also got some promising investments outside of your retirement plan. When you lose your job, and the search for ways to pay the bills is on, all options are on the table – including your investments.
There’s no question about it, a layoff forces some tough choices when it comes to your investments. You have to make choices about current needs versus long-term savings plans. In light of that, what should you do with your investments after a layoff?
1. Leave Tax-Sheltered Plans Alone!
Tax-sheltered retirement plans are often tapped following a layoff. And if there is very little in the way of savings outside of a retirement plan, this usually happens pretty early in the process. But this is fundamentally one of the worst post-layoff moves you can make.
Consider the complications of withdrawing money from your retirement plan:
- You will be using money that is invested for long-term needs to pay current bills
- You will be reducing the money that will be available for retirement – and the investment income it will earn
- By making an early withrawal, you will not only have to pay income tax on the money – both federal and state – but you will also be subject to the IRS 10% penalty tax on early withdrawals; this will increase your income tax bill at a time of reduced income
- Like everything else in life, success in retirement saving is largely about momentum; by withdrawing money from your plan well before retirement, you may lose that momentum – maybe even forever!
Tax-sheltered retirement plans should be the last piggybank that you break open in the event of a layoff. And even then, it should be done only in emergency situations.
2. Shift to More Conservative Assets
A layoff is an excellent time to shift your investments into more conservative assets. Sure, you may be giving up potential investment income, but the potential losses you could face will more than compensate for it.
Here’s the thing – when you don’t have a steady paycheck, you can’t afford to take big losses in your investments. You won’t be in a position to put more money into your investments to cover for the losses. What income you do have will need to be used to pay bills for survival.
You’ve heard the saying when it rains, it pours; the loss of your income makes you vulnerable to other catastrophes. By shifting your investments into more conservative assets, you reduce the likelihood of a sudden, substantial drop in value.
Having a solid income is one of the best ways to diversify against investment market risk. If you don’t have that income anymore, you need to get as close to a risk-free position as possible in your portfolio. This is true in your retirement portfolio, but even more so for your non-retirement portfolio. You’ll need to keep that money available for whatever might come up.
3. Resist the Urge to Gamble with Your Money
A layoff sometimes creates the desire to “make up for lost income” through your investments. That might include taking a chance in the stock market, or even with commodities, in an attempt to make up for the investment and retirement contributions that you’re not making as a result of your job loss.
For all the reasons stated above, you need to avoid taking chances with your savings and investments. It’s almost a cosmic reality, but when you lose a job you are more vulnerable to other financial setbacks. By avoiding high-risk investments, you can at least eliminate one potential source of financial trouble.
4. Keep Your Liquid Assets Handy
Conservation of liquid assets will be absolutely essential in dealing with life after a layoff. You’ll have to resign yourself to the fact that any liquid assets that you have will be fair game in paying for basic living expenses.
Liquid assets include cash-type investments, including certificates of deposit, treasury bills, money market accounts, and savings and checking accounts. In fact they can include any investment asset that is not either sitting in a retirement plan, or invested in equities or mutual funds through a non-retirement account.
You need to do the best that you can to preserve these assets, but you’ll also have to create a budget. The worst thing you can do is to draw down your liquid assets within a couple of months after your layoff. You have to do your best to parcel them out, a little bit at a time, so that they can act as a supplement to whatever reduced income you have for as long as possible.
One of the worst uses for liquid assets is using them to pay off debt. The intention is good – by paying off the debt, you also eliminate a monthly payment. The problem comes in that the loan balance you’re paying off is usually many times higher than the monthly payment you’re taking out. For this reason, a layoff is not a good time to begin paying off debt. Sure, it will enable you to lower your monthly expenses, but it will also deny you the use much-needed liquid assets, and often force you to borrow more money at a later date.
What advice do you have on how to handle your investments after a layoff? Leave a comment!
One of the scariest things about losing your job is trying to figure out what you will do about your living arrangements. After all, if you have a mortgage and lose your job, it might make it difficult to keep up with your payments. Whether or not it is practical to keep your home after a job loss depends on your situation, and what you can expect going forward.
Can Your Emergency Fund Make the Payments?
The first thing to consider is whether or not your emergency fund can handle your mortgage payments. Do you have enough assets to keep making payments?
If you can handle payments, with the help of your emergency fund, for six months or so, you might be able to tough it out – as long as you can get some income quickly.
When you are determined to keep your house, and keep making mortgage payments, you will need to make sure that you are prepared with income. Your partner might need to get a job, and you might need to accept work that you wouldn’t normally do. You might need to tap into investments, although you should be very, very wary of depleting your retirement account just to make your mortgage payments.
Be realistic about whether or not you can handle making your mortgage payments with your job loss. If you can’t expect to make the payments, it’s time to take action and move on as quickly as you can before things get worse.
Getting Rid of the House
“Borrowers finding it difficult to pay their mortgages should first communicate their difficulties to their mortgage companies,” says financial advisor Richard Sturm. “Mortgage companies are experienced with borrowers who run into difficult times and may have solutions that would equally benefit both the borrower and the lender.”
However, when it gets right down to it, realize that your lender will do what’s best for the bank before worrying about what’s best for you. But it’s a good idea to understand your options as quickly as possible, and work to find a solution before things get too desperate.
Sturm suggests that a short sale can be a reasonable option. “Borrowers with negative equity and no ability to make future payments might consider a short sale,” he says. “A short sale is an agreement made between the borrower and the lender whereby the lender may agree to take less than what is owed upon the sale of the property.”
This is a shorter process than foreclosure, and you might be able to avoid some of the problems that come with a foreclosure. However, it’s important to understand that the amount you are forgiven is considered income by the IRS. So, if you owe $150,000 on your home, and the bank agrees to allow you to sell for $135,000, the difference of $15,000 is considered income and you will be taxed on it. If your unemployment goes on long enough that this doesn’t matter, it’s not a problem. But if you find a job, or if you made good money before you lost your job, this loan forgiveness can result in higher taxes.
In some cases, foreclosure is the only option. As bad as it sounds, the reality is that you can often live in your home for months while you look for a suitable rental or other arrangement before the foreclosure process is completed.
It’s never fun to contemplate the realities of a job loss, but they must be faced. Consider your options when it comes to your home, and make sure you do what’s necessary for your finances in this difficult time.
So, if you were to lose your job, do you think you’d be able to keep your house? Leave a comment and tell us why or why not!
Your career is likely to take up a large amount of time. A “traditional” job often accounts for eight hours of your day, which means that you spend up to 1/3 of your life with your career. When you think about how much time you spend with your career, it makes sense to consider a career that you are likely to enjoy — or at least tolerate.
As you consider a career path, whether you are looking for your first-time career, or whether you are trying to reinvent yourself for a better life experience, here are some questions you can ask yourself:
1. What Do I Like to Do?
I remember watching Office Space years ago and chuckling at the conversations about what to do with a million dollars. You talk about what you would do if you didn’t have to work. The first thing you should ask yourself is what you like to do, and pinpoint some of your interests. The reality is that you can’t always do exactly what you want when it comes to your career, but you can examine what you like to do, and look for something that might be compatible with some of your interests and preferences.
Start with what you like to do, and figure out if there is a way to take that and turn it into a career – or incorporate it a little bit into your work life.
2. What Am I Good At?
Sometimes, it helps to start with what you are good at. It might not be exactly what you are looking for, but if you are good at it, it might make a good career choice. In some cases, knowing that you are good at what you do is its own reward (other than the money, of course). Take stock of your skills, and recognize that it can make sense to consider your talents and abilities as you choose a career path.
In some cases, what you’re good at may also coincide with what you enjoy. If this isn’t the case, you can look to enjoy some aspects of the work, or, if you enjoy something that you aren’t good at, you can attempt to learn to become proficient.
In any case, being able to do something well is a good start in a career.
3. Is There a Demand for My Skill Set?
One of the hardest lessons I learned when I began writing is that not everyone wants what I’m offering. Look at your skill set, and see if there is a demand for it. There are always positions for people with marketable skills. Make it a point to develop marketable skills, or to figure out a niche in which you can use your skills. I eventually had to give up my dreams of writing on certain topics — at least writing on them for money. Instead, I gravitated toward finance-related topics. It turned out to be a great choice, and I still get to write (which I love), and I’ve learned a how to adapt my skills to a marketable niche.
If you don’t have marketable skills, make it a point to discover what is marketable. If you can line that up with your preferences and talents, so much the better.
4. Do I Have Much Choice?
In some cases, you might feel backed against a wall. There are times when you just don’t have a choice with your career. You need the job and the money, so you take it. But that doesn’t mean you have to stay there. Ask yourself if there is a way to change the equation, and develop new skills and abilities, and you can create more choices for yourself.
What career path are you considering? Leave a comment!
One of the biggest problems I have in my freelance career is selling myself. First of all, I have a problem with impostor syndrome. But the other issue is that I’m unsure of how to talk myself up without sounding like an arrogant braggart.
No one likes a braggart, but, at the same time, when you’re trying to advance in your career, you are often required to toot your own horn. You need to show that you are a valuable addition to the team. It’s especially important to be able to show your value when you are asking for a pay raise. If you want to sell yourself, you need to be ready to say good things about what you’ve done. At the same time, though, you need to be able to temper your recital so that you don’t come across as arrogant.
1. Use Facts to Quantify Your Accomplishments
Rather than talking about yourself in a subjective manner, such as telling someone that you are the “best” at what you do, offer concrete examples of successes. In my case, I can point to high-profile publications that I’ve written for to demonstrate my experience and skill as a freelancer.
If you are a salesperson, your numbers are important. You can show how much revenue you’ve brought to the company. Consider your career accomplishments and how you can quantify them in a way that sounds like you are simply stating basic facts, rather than bragging about how awesome you are. Point out that you worked on a large project that received a great response. Point to a successful campaign you managed that brought in thousands of extra pageviews for a client’s website. Whenever possible, show numbers and concrete examples. This makes you appear more objective, and provides hard data for a decision-maker to consider.
2. Ask Someone to Speak on Your Behalf
Recently, during a conversation I was having online about a job opportunity, my business partner saw that I was back-pedaling and not selling myself at all. I was worried about sounding arrogant and over-selling myself. He jumped in and made a few comments about the quality of my work, and where I appear.
Sometimes, it works better to have someone else speak up on your behalf. If a co-worker compliments you on how helpful you were with a certain project, you can ask them to email the boss. When a client is satisfied with the work you’ve done, ask if they would be willing to provide a written testimonial that you can publish or include with your promotional materials.
Getting someone else to sing your praises not only allows you to be a little more modest about your accomplishments, but it is really attention-grabbing when you can show that others are so satisfied with you that they will go out of their way to express that satisfaction.
However, you can’t rely on the person to just do this on their own. Often, they don’t even think about the possibility of sharing the experience. Since it probably won’t occur to them, you can just say something like, “I’m glad you are happy with what I’ve provided. Would you mind providing a testimonial, or sending a quick email to my boss?”
With the right approach, you can prove your value without sounding like you’re bragging. And that’s something you can usually take to the bank.
How do you feel about selling yourself? Leave a comment!
Many of us like the idea of early retirement. We have visions of relaxing on a beach somewhere, enjoying our money. However, this might not be the case when you retire early. In fact, early retirement could actually result in higher medical bills.
According to a recent study reported on CNN Money, retiring at age 62 instead of age 65 means an additional $51,000 in medical expenses.
Of course, most of us don’t consider retiring at age 62 as early retirement. Most of us think of early retirement as something that happens between the ages of 45 and 55. So the problem is even bigger, because the $51,000 figure comes because Medicare coverage doesn’t kick in until age 65. So if you plan to retire 10 or 20 years before you are eligible for Medicare, your healthcare expenses could be a very big deal.
How to Deal with Medical Expenses in Early Retirement
If you are serious about retiring early, you have to consider the medical aspect of the situation. You are likely to be surprised how much health insurance costs, and how much you pay in medical expenses, once you no longer have access to your employer-subsidized plan.
The Patient Protection and Affordable Care Act
If you are in good health, you might be able to get an affordable health insurance plan on one of the state-run healthcare exchanges set up after the passage of the Patient Protection and Affordable Care Act (PPACA – also called “Obamacare”).
You can also look into COBRA coverage from your former workplace, but the reality is that COBRA insurance is often quite expensive. It’s probably not a bad idea to visit your state’s health exchange for more information and possible coverage.
Another possibility is to make use of a Health Savings Account (HSA). Now, before you decide to retire, set aside money in one of these accounts.
For 2014, the contribution for an individual is $3,300 and for a family the limit is $6,550.
If you have a high-deductible health plan right now, and you qualify for the HSA, it can make sense. Your contribution is tax-deductible, providing you with an immediate tax benefit. On top of that, you also have the advantage of tax-free growth. As long as you withdraw the money for qualified healthcare expenses, you don’t have to pay taxes on it.
If you are contemplating early retirement, the use of the HSA is a great way to prepare for future expenses. It’s one of the best accounts out there when it comes to saving up for medical costs.
“Working” During Retirement
You might also consider working during retirement. This doesn’t have to be a “traditional” job. Consider consulting, freelancing, or starting a business. This can provide you with a little extra cash flow to help you cover healthcare costs, and you can choose to do something you love that also keeps you busy.
Saving Money During Retirement
And, of course, you need to save money as much as you can. If you plan on an early retirement, you will need to factor increased medical costs on top of your other expense calculations. It makes sense to set aside an extra amount of money in an effort to boost your nest egg.
If you haven’t consider the extra health care costs that come with early retirement, there’s a good chance you aren’t saving enough.
So there you have it. Are you still considering an early retirement? Leave a comment and tell us why or why not!
Many of us don’t want a career that is “just” a job. Instead, many of us like the idea of fitting a career into a lifestyle. If you are tired of taking whatever job comes your way, here is what you can do to change things up and figure out which career is best for your lifestyle:
1. Pinpoint Your Values
The first thing you need to do is get down to some serious introspection. What do you value? What are your strengths? What do you want out of life? The reality is that you won’t ever get a job you enjoy – and that fits with your lifestyle – unless you understand what you want.
Take a look at what’s important to you, and then look for careers that match your values. If you like helping people, there are a number of careers – from teaching to healthcare – that allow you to do that. Figure out what makes you “tick” and then focus on a career that fits into that mindset.
This is also the step that requires you to take a look at your desired lifestyle, including the hours you work each week. If you don’t want to work 70 hours a week because spending time with your family is more important to you, then you’ll need to factor that in.
You’ll also need to consider the lifestyle changes you are willing to make as a result of these values. If you are willing to accept less money for more flexibility and more time to yourself, you might need to change the way you spend money.
2. Discover Training You Need
In some cases, you might already have some of the training you need to begin a career that appeals to you. In other cases, you might need additional training.
Find out what qualifications are required for your desired career, and then figure out how you will make that training happen.
You might need to take a few classes to get a specific certification, or you may need to get a degree. Be realistic about what’s possible, though. There are times when you might need to rethink your specific career path and figure out if another career path can help you reach your goals and live according to your values without spending too much money.
Another possibility is to look for ways to pay for your training. An employer might be willing to reimburse your costs, or you might be able to get student aid to help you along.
3. Start Your Own Business
There are times when the answer is simple: Start your own business. You can do your best to start a business that allows you to live your desired lifestyle while having the career you want.
While you don’t want to put your current income stream in jeopardy, you can still, during your free time, research different business ideas and figure out what you might be able to do in order to make it work. Sometimes, the perfect career is the one you create for yourself.
No matter what path you decide to take, though, it makes sense to pay attention to what’s available, and then make a plan to get into the career you want.
What are some steps you’re taking to find the right career for you? Leave a comment!
One of the most stressful aspects of the job search is the salary negotiation. However, it is often a necessary part of the job search. Trying to come to an equitable agreement with a company is important.
On the one hand, you don’t want a company to decide you’re too expensive and decide not to hire you after all. On the other hand, you don’t want to sell yourself short and end up underpaid and unhappy at your new job. Nothing hastens burnout like feeling as though you aren’t getting paid enough.
If you want to avoid some of thorniest issues related to salary negotiation, it makes sense to remember the soft benefits when negotiating salary. Rather than looking at your salary only as the number describing your income, consider the total compensation package, and focus on soft benefits when you feel as though you are stalling during your negotiations. Considering soft benefits is an important part of your negotiations, especially if you are having a hard time agreeing on an actual salary.
What Are Soft Benefits?
Soft benefits are those benefits that aren’t readily apparent when it comes to salary. They are sometimes considered perks. Even so, they can be quite valuable and worth having. Some of the items that qualify as soft benefits include:
- Flex time
- Daycare for your children
- Unpaid leave
- Vacation days
- Gym membership or access
- Discounted services
- Ability to telecommute for part of the week
- Health benefits
For some, a good health plan is worth lower pay. Also, would you be willing to work for $5,000 less per year if you could telecommute three times a week? It would save you money on gas and clothing costs. Not only that, but you wouldn’t have the same commute, and you could spend more time at home. Other workers value a flexible schedule. If you can work your schedule so that you come in or leave a little earlier or later, depending on what you need to do that day, it might be worth it to accept a lower salary.
Rather than getting too hung up on hitting a specific number, look at the entire picture. Are there special perks for working at the company? I know a couple who works for a company that has an on-site gym and offers one free meal a day in the cafeteria (the food is good). Another friend works for a company that provides daycare. My friend can check in on his child on break, and there is no worry about what is happening during the day. These types of benefits and perks can be worth more than a little more money each year.
It’s never fun to negotiate pay, but see if you can find some common ground by negotiating soft benefits. You can enjoy life more, provide for your needs, and end up more satisfied with your job – even if it doesn’t pay what you originally thought it would.
What are some other soft benefits that would attract you to a job? Leave a comment!
One of the essentials when it comes to finding a new job or advancing your career is the connections you make. Networking is an important part of career advancement, no matter what stage you are at. In fact, even when you are self-employed, it’s important to learn how to effectively network and connect with others.
If you want to connect quickly with others, and let them know what you do – and how you do it – it’s a good idea to develop a short personal statement or an elevator pitch. This is something that you can tell people who ask you what you do, or who ask you who you are.
The idea is to convey your competence, and quickly be able to show the person you are talking with that you are the right person for the job – or at least that you are the right person for someone else. When you have a good elevator pitch, it’s easy for others to see where you might fit. It’s a great networking tool that allows others to see if you might work for a friend of a friend, even if you aren’t quite right for the organization at hand.
Create Your Elevator Pitch
Think about how to briefly describe who you are or what you do. When I’m not talking with bloggers, I use an elevator pitch that basically boils down to: “I’m a freelance journalist. I provide content to a variety of financial sites.”
Keeping your elevator pitch short is key. My description of myself and what I do keeps things simple, but it tells others what I do. The fact that I use a keyword like journalist automatically implies certain things about me, and confers a bit of credibility. I sometimes follow up with specific sites that I’ve written for, or that my work has appeared in. Being able to say, “I provide content to financial sites like MSN Money and US News and World Report” is a helpful variation on my elevator pitch. I can also say something like, “My work has been linked to from The Wall Street Journal and USA Today.”
Consider how you can keep things short and simple, while at the same time conveying useful information that others will find attractive. Develop different versions of your elevator pitch so that you can adapt to different situations. What I tell a blogger, who understands the world of personal finance blogging, is slightly different to what I tell someone who isn’t steeped in the world of online publishing.
Think about various audiences, and develop three or four different pitches that can be used. Also, take the time to think of ways you can elaborate once the conversation gets going. While you don’t want to sound like a robot, you do want to be prepared.
Your Online Elevator Pitch
Don’t forget that, in the job hunt, how you present yourself online matters as well. Your social media profiles act as a sort of online elevator pitch. You should keep the description of what you do short and to the point. Someone coming across your LinkedIn profile, Google Plus profile, or your Twitter account should be able to quickly see what you do.
With so many recruiters and employers looking online, it makes sense to consider how you look in these situations. Crafting your online description should take into account the purpose of your profile, and what you hope to accomplish. Spend some time tweaking your online elevator pitch as well as what you intend to deliver in person, and you’ll make better career connections.
It sometimes seems as if everyone wants to retire early, or maybe it just seems that way on financial blogs. Most people seem to agree that it’s a good thing to do, but we’re going to be contrary today and consider reasons why you might not. In fact, there are arguments against early retirement, solid ones at that.
1. Early retirement preparation will impair your early years.
Relatively few people retire early in life. The simple explanation for that: Early retirement requires far more sacrifice early in life than most people are willing to make.
Truth be told, in order to retire early, you won’t be able to make it happen by saving 10% of your income, or even 20%. You’ll almost certainly have to save something more like 40%, 50%, or even more. And that’s not just for two years or three or even five – you’ll have to do that for at least 20 years, probably more like 25 or 30.
Not everyone has that kind of discipline. What’s more, most people aren’t willing to trade off their youth for a better life in middle age. To illustrate the point, if you want to retire at age 50, you’ll probably need to become a committed saver no later than age 25. Most people haven’t figure out exactly what they want to do with her lives, or even how they want to live their lives at that age. Making that kind of commitment – which involves giving up a quarter of a century of your life, and most of your youth – is more than most people can stand.
2. Your best efforts may not be enough to get you there.
Let’s take that last point a step further. Let’s say that you spend 25 years preparing to retire at age 50. You do everything that you need to do – you live beneath your means, you live one step above a homeless person, you save more than 50% of your income, and you invest it faithfully. What happens if there’s a stock market crash when you turn 45?
Your grand retirement at age 50 may get pushed back to 55, or even 60. At that point early retirement is starting to look like normal retirement. That may not be a bad thing, but if you gave up the best years of your life to make it happen, you’ll have paid a high price for something that’s fairly normal.
There other factors that can derail the best laid early retirement plans. For example, it’s one thing to plan early retirement if you are either single, or married and childless. But if a child or two come in to the picture, the plan may go right out the window.
Even apart from children, you could get snagged by a career crisis that drains of some of your resources. You can also have a major medical event – either for yourself, your spouse, or a close loved one – that will soak up big chunk of your savings.
The point is, no plan – no matter how well carried out – is guaranteed to work. If you’re working diligently to provide yourself an early retirement, you’ll be giving up more than money to make it happen – you be giving up a big chunk of your life.
3. Early retirement increases the chance of outliving your money – dramatically.
The thought of out-living their money is a serious consideration for all who would retire. But if your plan is early retirement, that issue becomes even more complicated.
If you retire at age 65, you’ll probably have to provide for yourself for something like 20 years. But if you retire early at 50, you’re looking at covering 35 years. Unless you are a financial wizard, it may not be possible to provide for that many years on the strength of investment income alone. Markets rise and fall, and sometimes you’re distracted by other events that interfere with your investment success.
Many people who retire early in life find that their exit from the world of work is only temporary. Five, or 10, or 15 years after early retirement, they find themselves back in the workforce.
4. The need for a purpose in life.
Some people talk about early retirement as though they hate their work and want a way out. Early retirement becomes the default path to freedom.
But what if you don’t hate your work? In fact, what if you actually like your work?
That’s a complication in the early retirement scheme. We don’t just work to pay the bills – our work often fills other roles in our lives, emotional ones that we don’t fully understand. For example, work is a form of contribution to the human race – it’s our contribution. It’s also our connection to the world around us. Oh sure, there other ways to connect with the world, but work has a way of making a connection more intimate than other methods. It’s a form of interdependence between us and the world around us.
There are even some among us who feel that we have something to contribute to the world, something maybe extraordinary. Our work is our way to bring it about. Early retirement would short-circuit that desire.
Early retirement could remove those silent advantages that work provides.
5. Balance is always the key in life.
We all have opinions, and mine is no more valid than anyone else’s. But I tend to think that the recent emphasis on early retirement is way overblown. At its deepest level, it’s trading youth for a large enough pile of money to not have to work for the second half of your life. You can engage in something like that, but you have to carefully consider the cost of doing so.
I think that balance should be the real key in life. That means you live your life – and youth – as well as you reasonably can, while making a provision for the future. That’s similar to what people normally do by saving money in emergency funds, and for retirement – but at a more reasonable rate (the more typical 10% or 20% pay).
By doing that, you are enjoying the benefits of today, while making preparations for tomorrow. You’re trying to live a good life now, rather than delaying everything into your later years. In a way, early retirement is a form of back-loading your life, and that isn’t necessarily a good thing.
Given that we never know how long we’ll live – or what the quality of that time will be – it doesn’t seem that building your finances around early retirement is entirely worth the trade-off.
But that’s just me. What’s your thought on early retirement? Is it worth what you’re giving up to get, or do you agree it’s best to find some kind of balance over the course of your life? Leave a comment!
With more than $1 trillion outstanding in student debt (some of it mine!), it’s no surprise that many college grads and others are trying to figure out how to repay their loans.
For those with jobs that allow it, the next question is whether or not it makes sense to pay off student loans early. If you have student loans, carefully consider your own situation, as well as the general pros and cons associated with repaying your student debt early.
Saving Money on Interest
The first consideration is how much you could save. By putting extra money toward your student loans each month, you can pay them off earlier, and save money in interest. Cutting the term of your loan in half can save you thousands of dollars in interest. That’s a strong argument in favor of paying off your student loans as early as possible.
However, before you tackle your student loan debt, it’s a good idea to look at other types of debt. If you are paying 13% interest on credit card debt, it makes more financial sense to pay off that debt first, before attacking your student loan with 7% interest. Make sure that any student loan pay-down plan takes into account your other debts. Your student loan debt reduction should be coordinated with the rest of your debt pay-down plan.
What Else Could You Do With the Money?
If you have a student loan that has a higher interest rate, of between 6% and 12%, it does make sense to pay it off early. However, my student loans were consolidated back in 2005. Not only were interest rates on student loans much lower then, but my servicer knocked down my rate when I signed up for automatic payments, and dropped it again after I made 36 on-time payments. As a result, my rate is locked in at less than 2%. Even counting inflation and taxes, my investment portfolio is doing better than that. Instead of putting extra money toward paying down the student debt, I’ve increased my retirement account contributions. Over time, putting that money toward investing makes more financial sense than paying off my student debt early.
Another consideration is the fact that I also get a tax deduction for the interest I pay on my student loan. With higher-rate student loans, that tax deduction isn’t really worth it, unless you use it to your advantage while you pay off other, higher-rate debt. In my situation, paying off the student loans isn’t a priority because of the low rate and the tax deduction. I have other things to do with the money.
Peace of Mind
Of course, there is no price that can be put on peace of mind. Even with the financial advantages I see to not rushing to pay off my student loan debt, others couldn’t live with it hanging over them. Instead, they would feel better with the idea of being completely debt free. And there are risks to keeping the student loans around. My income situation could change, and then I wouldn’t be able to make payments. However, I have emergency-type funds, and with federal student loans, it’s a little easier to get a deferment than it is for other types of debt.
In the end, you need to look at your situation and decide what works best for you – what you are most likely to be comfortable with. Paying off your student loans early is a big decision, and it is one that you should carefully consider.
How about you? Are you going to pay off your student loans early? Leave a comment!