Budgeting and Loan Repayment

Tips for Budgeting and Student Loan Repayment

How you handle money over the next few years is key in reaching your future financial goals. Developing some personal finance habits now will help put you on a path toward financial wellness. Here are 5 habits you should add to your routine.

Habit 1: Track your spending

You can’t know what you have unless you know your spending habits. Those who track their spending often have less debt. Try writing down everything you spend money on each day for a week or month: from filling your car with gas to buying avocado toast or ordering items online. You need to see where your money goes. Keep a notepad in your purse or download a spending tracker app on your phone. After a few weeks, you will have a clearer picture of your spending habits.

Take note of any expense that is non-essential. Try picking three non-essential expenses and eliminate them in the next month. For most people, this single step will save hundreds of dollars a year. For example, an average lunchtime meal at a restaurant costs $10. If you packed a lunch from home, it might cost you $4. That’s a $6 saving. If you brown bagged it three times a week, that’s a monthly savings of $72. Over a year, you would save $664! Small changes in a person's spending habits can result in big savings over time.

Habit 2: Create a budget

Budgets get a bad rap. Many believe they deprive you of the things you want in life. In truth, a budget can be used as a tool to help you get the things you want. A budget simply helps you figure out how much money you need to cover your expenses and it’s your responsibility to make sure you don’t spend more than that amount. Here are some steps to get you started:

Total how much you need monthly for the absolute essentials. Essentials include your rent or mortgage payment, utilities, groceries, childcare, and debts, like a student loan. Don’t forget to add contributions to your emergency savings account to your budget. Calculate all non-essential expenses, like entertainment, eating out and any gifts you may want to buy. On tight months, you can save money here.

Once you have the total you need to cover your expenses, deposit that amount into a separate account at the beginning of each month and use it to pay all your bills. By the end of the month, you should be near zero. Deposit the rest of your pay into a savings account. This is called the budget-to-zero method.

Remember to review your budget periodically. Your budget should be flexible enough to accommodate things like summer vacation and holiday seasons, when your spending habits will likely change.

Habit 3: Build an emergency fund

An emergency fund helps you handle a financial surprise without going into debt or resorting to high-cost loans. Research shows that households with emergency savings below $500 are more prone to worry, anxiety and loss of sleep. Even setting aside small amounts, like $100 per month, will help you in building this fund over time. Aim to have three-to-six months’ worth of your living expenses in a separate savings account that can be accessed quickly. The key is not to touch it unless for a financial dilemma, like an unexpected car repair or a job layoff. These surprises usually don’t give you time to adjust your budget.

Habit 4: Automate your savings

Saving isn’t always easy. Making automatic payments can ease the stress. Consider having a portion of your pay directed to a separate savings account. By having the money automatically transferred, you won’t miss it (or accidentally spend it).

Habit 5: Tackle student loans

Many millennials are burdened with student debt. Now is the time to examine any students loans you have and develop a plan to pay them off. First, review their terms, conditions and the various repayment options. These will vary depending on whether they came from a private institution (like a bank) or whether they are a federal loan.

Figure out the total amount you owe, the type of interest rate (in some cases, you can choose between a floating or a fixed interest rate), your monthly payment amount, and how long it will take to pay off the balance. If you have more than one loan, or a line of credit, you may have multiple monthly due dates.

Making student loan payments on time boosts your credit score. Federal student loans and student line of credit payments form part of your credit history. If you consistently make your payments on time, it shows lenders you are reliable at paying off debt, if you miss or are late with your payments, it may indicate to lenders that you are a risky borrower. These small actions might make a difference later on when you apply for a loan or apply to rent an apartment.

Tips for repaying your student loan:

Build loan payments into your budget and make at least the minimum payments. You can even set up automatic payments through your financial institution.

Increase the size of your monthly payments. The amount you pay over and above your monthly minimum payment will go directly toward the principal, reducing your total loan amount.

Consider making lump-sum payments. This is one of the fastest ways to pay off debt and will result in paying less interest overall.

By cultivating these five personal financial habits, you will be well on your way to reaching your financial goals and paying off your student debt. Remember: Don’t let perfection be the enemy of good. There will be times when you will be unable to meet your budget. Budgeting is a life-long pursuit. Each month is a new opportunity to recommit to these habits. Make sure you reward yourself occasionally.