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5 ways to save money, even if you're drowning in debt

  • When you're already making monthly payments on student loans, you might5 ways to save
    think saving money is out of the question.
  • But in most cases, financial experts say you should still be saving even if you're in debt.
  • Refinancing your student loans and creating multiple savings accounts are two ways experts say you can better pay back debt while also saving for the future.
 


You might be under the impression that you have to pay off all your student debt before you even think about trying to save money. But according to financial experts, you can — and should — do both at the same time. 

"The reason you might even want to consider saving while simultaneously paying off debt is because your money grows with time, and the more time you give it the better," Priya Malani, who advises millennials at Stash Wealth, told INSIDER. "In some cases (as with student loans), people may be paying off their debt for decades and waiting to save could be detrimental to their long-term wealth potential."

Kristen Euretig, a certified financial planner at Brooklyn Plans, said it's important to save some money — even while you're paying off debt — in case of an emergency.

"If you put all available money towards that repayment and something comes up then you won't have money available to cover an emergency and will need to rely on debt again, repeating the cycle," Euretig told INSIDER. 

Here's what you should do to save money while also paying off your student loans. 

1. Focus on your debt's interest rate.

The most important factor to consider when it comes to your financial priorities is the interest rate on the debt you have. 

Credit cards tend to have high interest rates, an average of 12.77% in 2017, according to CreditDonkey. Student loans, on the other hand, have interest rates in the single digits. The rate for direct subsidized undergraduate loans was 4.45% in 2017. 

"We almost never have clients saving if they are paying down credit card debt," Malani said. "And if we do, the proportion skewed significantly towards debt pay off. Anything else and you're just fooling yourself because any of the savings you're doing will ultimately be eaten up by those high interest expenses."

So above all else, pay off high-interest debt before trying to save.

But if you're paying back student debt, the money you save due to the lower interest rates should allow you to save some money on the side. 

2. Refinance your student loans.

One option to get an even lower interest rate on your student loans is to refinance. 

This basically means you replace your existing loan with a new loan through a private lender — sometimes at an interest rate as low as 2.5% or 3%, according to Forbes. But you might have to beef up your credit score first. 

"Improve your credit score so you can refinance your student loans at the lowest possible interest rate," Malani advised.

Figure out if you qualify for a lower interest rate for your loans.

Most lenders require a score of 700 to refinance, according to Student Loan Hero.

Keep in mind that, by refinancing, you will give up federal loan protections including income-based repayment plans, loan forgiveness, deferment, and forbearance. If you go this route, whenever you see a jump in your credit score, you should refinance your loans again, Malani added. 

Additionally, refinancing usually comes with transaction fees. To figure out whether refinancing is worth those costs, Malani said to consider your outstanding loan amount. If you have an $80,000 balance, for example, a lower interest rate would most likely be worth it, she said.

"And if you're [refinancing] with the same provider [as the first time], there may not be any transaction fees," Malani said. "A 'good to know:' many online refinancing programs show you the rate you prequalify for before you apply formally (saving you from a hard credit check) and allowing you to do the math to see if the refinancing (including the cost of the transaction fees) is worthwhile." 

Depending on your loan balance, this could save you thousands of dollars in interest over the duration of your loan — extra money that could go toward saving and investing. 

3. Consider taking out a personal loan.

Another option to think about if you have credit card debt is to get a personal loan, Malani said.

If you qualify for a lower interest rate than you're getting on your credit card, you can use the personal loan to pay off that debt and then repay the new loan at a lower rate. 

SoFi and Marcus are some of the best personal loan lenders with low rates and no fees, according to NerdWallet.

Find a lender with the lowest rates and no fees, if possible.

Again, this opens up opportunities for you to save or invest the money you save on interest. 

But if your credit score isn't good enough for you to qualify for a better rate, "forgo saving and get this paid off ASAP," Malani said. 

4. Automate your debt payments.

One easy way to save money is to make your monthly payments automatic.

"Automate your debt payoff strategy so you don't get stuck with any late fees or other unnecessary charges," Malani advised.

Making your monthly payments automatic can save you money.

Federal loan servicers will also offer you a 0.25% interest rate reduction if you automate payments, according to Student Loan Hero. 

Over time, that can save you a lot of money. 

Automating transfers to your savings account can't hurt, either.

5. Create multiple savings accounts.

Euretig said she thinks of debt repayment as a stool with three legs.

The first leg is obviously to repay the debt, but most people neglect the other two legs: saving for an emergency and saving for what she calls a "freedom fund" — for travel, visiting family and other fun things.

Set up different savings accounts for different goals.

"If you don't have a separate savings [account] for these types of activities, often times people will use debt to do them as opposed to skipping them," Euretig said. "While this may seem like a longer way to repay debts I have found it with my clients it is the most effective and sustainable way to get out of that and stay out of it." 

This multitasking approach is the most successful way to pay back debt and save money, she said.

This article originally published on BusinessInsider.com by Katie Warren



Posted Wednesday, May 02 2018 11:00 AM
Tags : 5 ways to save money, even if you're drowning in debt

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