Federal student loan borrowers can take advantage of the government-mandated freeze on payments and interest (which is slated to last until January 2022). That makes now the perfect time to take a beat, take a breath, and make a plan.
Your instincts are spot-on: it’s wise to start your portfolio as soon as you can. Time in the markets is one of the most powerful tools in investing. The earlier you start, the more years you have for contributions to compound and earn returns.
But when you’re trying to pay off student loans, investing at the same time can feel daunting—almost like that Spideman meme, with these two goals pointing at each other. “In actuality, these two financial goals don’t have to conflict,” explains Michael Briese, Senior Vice President – Private Client Advisor – J.P. Morgan Wealth Management. “If anything, doing both correctly will help you reach your goals even faster.”
It’s possible to do both at the same time—it just takes basic prep (you can’t make a bouillabaisse without chopping your veggies). Here’s the 4-1-1 on 1-2-3 things to check off.
1. Manage student loan payments in smart, simple ways
“In today’s low-interest rate environment, you first want to make sure that you’ve locked in a low rate for your loans—and if you haven’t, consider refinancing,” explains Briese. There are other simple ways to manage loan payments too. “You could save up to .5% simply by setting up auto-pay, and if you make bi-weekly payments instead of monthly, you’ll make an extra payment each year without even realizing it.”
2. Pay down high-interest debt
Say you have a $100 charge on a credit card with a 16% interest rate. Do you pay this off, or invest that $100? If you expect a 6% return, $100 will grow to $106 by the end of the year. However, your credit card debt will have increased to $116—leaving you $10 in the red. Moral of the story? If the interest rate on any consumer debt you have is higher than projected investment returns, pay it down first.
3. Build a rainy day fund
You need a buffer of cash to avoid increasing credit card debt (or liquidating investments early) to cover emergencies. Shoot for 3-6 months of living expenses in a savings account. To make progress toward this, try socking away your entire tax refund, or an annual bonus check or commission.
Once you’ve done these three things, you can start building your investment portfolio. If you prioritize this prep work with a bit of focus, it’s possible to start investing—while paying off student loans—sooner than you think.