3 Tips for Short-Term Savings When You Have Student Loan Debt
Are you having trouble setting money aside from every paycheck? You’re not alone. About 61 percent of people say they don’t have enough money saved up for six months’ worth of expenses. Moreover, 49 percent of Americans are even worse off—they’re not able to set anything aside for their emergency fund, and are living paycheck to paycheck.1
Now consider the fact that not all of those people have student loan debt. The cost of living is high and the entertainment options limitless, meaning short-term savings are hard enough as is. Saving with debt on your plate is even harder.
Saving is hard, but there’s another factor to consider here: according to the Bureau of Labor Statistics (BLS), after college, the average American has $423 per month leftover in their budget after paying bills and typical expenses.2 With that money, they could save up $5,076 per year. So why aren’t they saving? For the 49 percent of Americans who don’t have any short-term savings, there may be expenses they’re not reporting or a perception that short-term savings just aren’t important.
Why You Should Save in the Short Term
Let’s return to the fact that you have student loan debt. When it comes to saving for the future, it’s easy to push short-term savings out of your mind and steer that money toward paying off your debt. No one can blame you in this respect, and you’re not alone. The average millennial owes $26,485 to various creditors, while the average baby boomer owes $19,217. No wonder so many people don’t set aside anything—along with their other expenses, they’re busy paying off debt.
Suppose all of a sudden, you get in a car wreck. Best-case scenario, your car is damaged and you walk away unharmed. Or, like 2.3 million other Americans per year, you’re injured or disabled in the crash.3 Either way, you’re hit with an emergency and you need money now. That’s where your short-term savings—your emergency fund—comes in. With no emergency fund, you’re forced to increase credit card debt. This piles more debt on top of what you already owe for student loans.
Forbes writer Julia Chang says you should stockpile an emergency fund “before you accelerate any other financial goals, like paying more than the minimum owed on your credit cards, fast-tracking your student loan repayment or saving for the down payment on your future dream home.”4
If an emergency of any form hits and you don’t have any money, it will be much more difficult to pay off your student loan debt and achieve your goals than it would have been if you’d had an emergency fund. Simply put, with no emergency fund, you’ll be in a deeper hole.
Short Term vs. Long Term Savings
Short-term savings are funds you set aside for anywhere from three to nine months of downtime, in case you have no income during that time. Long-term savings are funds you set aside for anything past nine months.
Simply multiply your monthly take-home income by nine and work towards setting that amount aside in a savings account. Nine months is not by any means a hard-and-fast number. Forbes’ Julia Chang explains that nine months’ worth of income is a good number to aim for if you, or both you and your spouse, have unpredictable income. In other words, if you’re a freelancer or self-employed, it’s best to have a nine-month safety cushion.
Chang says that the largest group of people are more likely to need just six months’ worth of savings in their emergency fund. Six months is a great cushion for anyone with a steady, predictable income. If you don’t have anything saved up at all, start small: aim for three months’ worth of savings, and move upward from there.
3 Tips to Save in the Short Term
So now you’re wondering, “How, exactly, do I save up for my emergency fund and cope with my student loans at the same time?” To do this right, consider the following:
1. Consolidate and Refinance Your Student Loans
Did you get multiple federal loans or a combination of federal and private loans to pay for college? You may qualify for a lower interest rate. This would help you have extra money to set aside for your short-term savings. Consolidation and student loan refinancing turn your multiple loans into a single loan, and if your credit is good enough, it lowers your interest rate. Refinancing is a strategy people use when they’re saving up for vacations, and it can also help you build your short-term savings. Just take the difference between your old interest rate and your new one, and set aside your savings.
2. Use Budgeting and Savings Apps
USA Today estimates an online budgeting tool can help you create a workable budget in 30 minutes.5 For that purpose, Mint is a fantastic, free option that will work on any operating system. You set up your budget, link your bank accounts, and receive alerts when you’re going to exceed your budget. PocketGuard is a more minimalistic app for iOS and Android. Based on your budget, PocketGuard tells you what you can afford to spend each day, week, or month.
But you don’t just want to create a budget, you also want to proactively save money. You can have an app like Mint deposit cash directly into your savings account. Have it deposit a set amount each month. Mint is designed to help you find ways to save, so it will analyze your financial activities and make recommendations.
Truthfully, the best way to save money is to invest it because you get a better return on your investment. For that purpose, you can use an app like Acorns, which automatically rounds up any purchase you make on a card and then invests the spare change for you. But it’s best to invest for the long-term; for a truly short-term, emergency savings fund, stick to a savings account or a money market savings account you can access easily.
3. Set a Reasonable, Reachable Savings Goal
If you say to yourself, “I want to have as much money in my savings account as soon as I possibly can,” chances are you won’t achieve any savings. Rather, set a small, concrete, dollar-figure goal for each week or month’s worth of savings. The average American spends $202 a month on entertainment. Can you shave off $101 from entertainment expenses and set it aside? The average American spends $424 on things that fall into the “other” category, such as alcohol, clothes, and cigarettes. Can you shave off $212 from the “other” category and set it aside? Make small, concrete commitments like this until you have three to nine months’ worth of income in the bank. Then, get started on your long-term savings and investments.