Refinancing student loans can allow for lower monthly payments, and consolidating your loans can be instrumental in combining everything into a more easy-to-understand, single bill. When you do this, you may discover that you have a higher cash flow each month due to the lower expense. Cash flow, here, just means how much money you have to spend for the month or period after all essential bills are paid. Most people get pretty excited when their cash flow goes up. Sometimes thoughts immediately turn to the first item that might be nice to own with that money. It is easy to let one’s spending simply creep up when such a windfall occurs, but what would be some responsible ways to handle that cash? Here are some good, fiscally-conservative ways to invest in yourself and your future while saving you money long-term.
Create an Emergency Fund
If you find your checking account bone-dry at the end of each month, typically, a great way to start using your student loan refinance savings is to start saving to have a little “rainy day fund” or “emergency fund.” If you haven’t heard of this before, it’s basically saving your money that can help when unexpected expenses come up, like a surprise medical bill or a car repair. Many people first aim for an emergency fund of $500 or $1000, but any amount can be helpful. Long term, 3-6 months of expenses in an emergency fund protects against bigger emergencies, such as a job loss. You can store this fund in a savings account with no penalty for withdrawals; that way, when you aren’t having emergencies, that money may be earning you interest.
Emergency funds can easily become “convenience funds,” so do what you can to specify what won’t be taken out of the emergency fund. You are the only one who gets to decide this but it’s important that you make and follow your rules. This way, you aren’t disappointed when a roof repair bill hits and you’ve spent the emergency fund on something you now regret.
Adding a little bit to the emergency fund each month, even if it’s just $5, can be a good habit. It means the emergency fund is “self-healing,” or that it grows back when you need to spend from it.
Credit Card or Car Debt? Pay Ahead To Save the Interest
You’ve refinanced your student loans and bettered your cash flow, but how are your other debts looking? Often, credit cards can have high-interest rates, so your best “investment in yourself” may be to pay those off. While the rates are often lower, many people prefer to work toward owning their cars to cut one monthly expense. Regardless of what kind of debt you are working with, a practical next step after establishing an emergency fund is to pay down other debts. Some people prefer the “debt snowball” method of paying off your smallest debt first and using the payment savings to pay off other debts. Other people prefer to pay off the debt with the highest interest rate first. You can make this decision based on what motivates and inspires you most; after all, there is definitely an emotional component to personal finance. When we feel inspired by our choices, we tend to make more good choices!
Have a Child? Start a 529 Account
If you have children, you may feel overwhelmed at the thought of helping them fund a great education. 529 accounts make it possible to save money in an investment account that grows for your child’s future schooling expenses. The money grows tax-free, meaning you won’t end up eating into your profits by paying taxes when you withdraw it to pay for tuition, lodging, books or other educational expenses. What’s great is that you can start one even when your child is very young.
Saving just a little bit at a time can end up creating a major boost for your child when they make a college decision. While you may choose to start the account and make regular contributions, some states, like Ohio, make it easy to let others contribute as well, like friends, family, and grandparents. Just getting the ball rolling with your student loan refinance savings may start an account that others can assist you in. Just make sure you investigate the 529 account in your own state since they have small variations in what they offer.
Not Getting Your Employer Match Yet? Up Your 401(K) Contribution
Many employers offer some form of a match for 401(K) contributions. When money is tight, it can be hard to volunteer to have money deducted from your paycheck to put in your retirement account. If your company offers, for instance, a 2% match, you should consider taking advantage of this employer benefit. With the new savings from your student loan refinance, figure out if you are missing out on any “extra money” by not saving up to the match limit in your 401(K).
Have a Modest Income? Try a Roth IRA!
Many of us have times where our monthly income or yearly salary aren’t very high, but we are working. During these times, the Roth IRA shines as an awesome way to store one’s savings from a student loan refinance. The biggest savings occur if you are currently in a fairly low-income tax bracket, though there are savings at all tax brackets. With a Roth IRA, you pay post-tax dollars in (so no savings this particular year on your tax return), but you take the money out, including the proceeds, tax-free in retirement. There are a variety of other benefits of this instrument, including the ability to withdraw from them penalty-free up to the amount you’ve put in (not the earnings, but still!), and you can contribute indefinitely. The limit on Roth IRA’s is $6,000 in 2019, so keep that in mind if you find yourself getting close.
Evaluating Smart Investments for Your Savings
These are only a few of the ways to utilize your savings; there are so many more out there in the world! However, when presented with an investment opportunity, consider the following questions to make sure that you are making the smartest decision available to you:
- Does this choice make me more independent from financial worries or payments?
- Does this choice reduce the interest I’m paying to lenders or increase the interest I’m earning on my money? Smart investments use the money to make more money, and you want yours to do this.
- Is this savings instrument FDIC Insured? The Federal Deposit Insurance Corporation insures many kinds of typical savings and checking accounts in the event of market collapse or other shocks to the economy; it helps you feel secure. Not every smart investment will have this insurance associated with it, but having this insurance included is a mark of stability and safety for your money.
- Does this investment reduce how much tax I have to pay? Whether that reduction is now or in the future, reducing the taxes you have to pay is like a little “extra interest” on top of whatever your money earns, and it is guaranteed as long as you are using the tax-advantaged investment in the way it was meant to be used.
- Does this investment improve your quality of life? Above, we didn’t discuss things like adding to your home or making needed home repairs, but doing such things can save on making emergency repairs later and can make your life better now. Sometimes, these needs outweigh the other needs in your financial life, so they are important to consider!
Refinancing student loans can help you create savings that change the cash flow situation for your family, and making thoughtful decisions with those savings can be a great step into the future for financial stability. Consolidating your loans and assessing your financial big picture can help get you on a path toward success and future plans.