Why Paying Back Student Loans too fast can be a BAD idea
A smart financial plan doesn't pay back student loans aggressively until you have a cash savings for an emergency. Look at this example.
Say you earn $4,000 a month after taxes and retirement. Life is good you have an extra $700 in your budget so you decide to use it to pay off your hefty $30,000 in student loans. In the first year you pay off $8,400 of those loans. You’re feeling accomplished 😌💪🏿. The next week you get laid off due to budget cuts. You have $1,000 saved as back up cash but that’s it. Yet you still have $3,300 in bills to take care of plus the minimum payment of $200 on your student loans is still due. You call your student loans and ask for a deferment due to lost of work and they approve. However, your landlord, the utility company, your car note, and your baby’s daycare (which you still need to go look for a job and keep their spot) don’t care that you’re out of work. They want their money now. So you open up a credit card to put your bills on for “just this month”. The credit card has 27% interest! The first month you charge your $2,700 in bills. However the $600 a month day care only accepts cash or check. So you use your $1,000 savings to pay that. Month two comes, you’d thought you’d find work by now but you haven’t. So you charge another $2,700 in bills to the credit car but only have $400 to pay the day care. So you borrow $200 from a family member. Month three comes and still no job offers. You’re now forced to take you child out of day care and change another $2,700 to the credit card. It’s harder to go on job interviews with a baby at home. The credit card bill is now up to $8,270 in three months and still growing at 27% interest. Another month out of work and the card will be maxed out. At the time it seemed great to pay off the $8,400 in student loans. Looking back you really wish you wouldn’t have made the extra $500 payment on your student loans because that extra $6,000 in cash could have helped you now—-Especially with the baby’s daycare.
It’s important to understand that all debt isn’t bad. Just paying off all your debt as quick as you can might not necessarily put you into financial freedom. You need to think of the what if cases. Financial planning is a strategy game! You need to be prepared and ready for any situation to occur. It’s those small tiny setbacks that can put you back years on your plan. And you don’t have to loose your job. Your car could break down and need $2,000 worth of work and then you got water heater breaks and that’s another $2,000. You can rack up $4,000 so easily. It’s these very situations that hold people back. Even in their budget, they chose to ignore that situations like these will happen, so they can feel comfortable in their own minds about the money they have.
So remember, sometimes it’s good to pay down debt slower especially low interest debt!!!! Student loans and mortgages have some of the lowest interested rates right now.
Don’t rush to pay off your debt without a plan of how you will survive if your loose your income or if something as simple as your car breaks down.
1) Figure out your total monthly bare necessities expenses. This is everything you need to go on with life as normal in case you loose your job. Rent, utilities, daycare, car note, food etc. Then create a plan to save 3-6 months of these expenses. This might mean you need to give up some things in your budget that make you comfortable now so you won’t find your finances out of control later!
How much debt do you currently have in student loans? Harder question: What is your total minimum monthly payment for your student loans? (don't say $0, find out the amount after you come out of deferment). Don’t be embarrassed let’s get it out there! The more we confront something the more uncomfortable we become and the more we want to change it!