Fix My Finances: Paying off student debt while saving for a home

Joanna Campione
Joanna Campione

In today’s episode, we meet Hannah. She’s a 26-year-old benefits analyst from San Diego, Calif. Hannah wants help building an emergency fund and needs some advice on putting her money to work for her future.

Dealing with debt

Hannah admits that she doesn’t quite know what to do with the money she’s earning.  She makes a good living but has some debt, which is a constant worry.  

Hannah has undergraduate loans totalling $77,370 at an interest rate of 5.477%. But she also has graduate school loans that add up to about $19,600 with a interest rate of 6.16%

Hannah also has a car loan of about $14,000 at a 6% interest rate.  

While she should keep up with monthly payments on her all debt, New York-based certified financial planner, Stephanie Genkin, says Hannah shouldn’t let student-loan debt ruin her life.

“The interest rates on [her] student loans are low,” says Genkin. “I would not worry about pre-paying these loans at this time … If [she] really [wants] to prepay some student loans, then I would start with [her] grad school loan first, since it carries a higher interest rate,” she says.

Another suggestion: Hannah should put her federal loans on monthly auto-pay.  This way she can get a 0.5% interest-rate deduction. “This may not seem like a lot, but every bit helps,” says Genkin.

Focus on retirement

Hannah is trying to build up her savings as she pays off her student loan debt. She currently contributes 6% of each paycheck to her employer-sponsored 401(k) plan. Her company also has a matching program which she is taking full advantage of.

The fact that Hannah has started saving for retirement already is a good move, says Genkin. Most people in her age bracket haven’t.  According to a report from Wells Fargo, more than 40% of millennials aged 17 to 35 have not started to save for retirement.

Genkin says Hannah should “auto increase” her contributions by 1% annually to boost her savings. Also, because she is about 40 years away from retirement, Genkin suggests her portfolio be almost entirely in stock funds, and she should make sure her investments are growth-focused.

Saving for a rainy day

Hannah feels she needs an emergency fund because she’s worried what she would do if she were ever laid off from her job. Genkin says, “It’s important to have three months of cash saved in your bank account for peace of mind.”

Starting with her next paycheck, Hannah has set up a direct deposit for 10% of her check to go directly to her savings. Genkin suggests Hannah put that money in an online bank account so that it’s not as easily accessible as with a brick-and-mortar branch and auto deposit a percentage of her paycheck every month.

“Out of sight, out of mind makes it easier to let that money accumulate for when you really need it,” says Genkin.

Genkin warns though that 10% of her income may be a bit steep to be putting into savings right now.  It could become such a “strain that it pushes [her] into credit card debt,” says Genkin.

On the homefront

As she works on saving for the long-term and paying off her debt, Hannah also wants to save to buy a condo.

Genkin says Hannah doesn’t “have to wait until all of [her] student loans are paid off, but it would be wise to make sure [she has] a good hold on [her] current payment and expenses before [she takes] on a mortgage.”  

Until Hannah gets serious about buying a place, Genkin suggests she takes the next few years to build up cash savings, pay off her car loan and beef up her retirement investments.

“It’s wise to build a strong financial foundation before you purchase real estate,” says Genkin.