Prioritize Emergency Savings Over Debt Repayment in Your First Job
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Chapter 1: A Lesson for My Younger Self
"Dear 21-year-old me...
As you begin your first job, prioritize setting aside funds for an emergency savings account rather than channeling all your earnings into debt repayment.
During my initial role after college, I earned a significant income from commissions. Initially, I thought it wise to use that extra cash to reduce my student loans. However, when I unexpectedly lost that position, I had to rely on credit cards for basic needs—debt that still lingers today."
My Approach After College
Upon landing my first job, I faced a dilemma: should I allocate my earnings towards student loans or build an emergency fund?
I opted for the latter.
While conventional wisdom often suggests establishing a $1,000 emergency fund before tackling debt, I continued to grow my emergency savings until I reached a full year’s worth of expenses. It was only then that I felt secure enough to start focusing on my student loans, though I didn’t immediately do so.
Instead, I chose to invest my funds—enough that I could pay off my loans at any time if I wished.
The reality is, if you have a manageable amount of federal student loans, it’s perfectly acceptable to take your time in paying them off while investing in more lucrative opportunities.
Before long, I had accrued sufficient investments to cover my student loan balance; however, I continued to invest instead of paying it off right away. I wouldn’t have approached it any differently.
Section 1.1: The Balance of Debt and Savings
You might wonder: is it better to have no debt or a financial safety net?
Truth be told, you can achieve both! However, having a financial cushion can be invaluable in times of crisis, such as a job loss or unexpected medical expenses. I’d prefer to have that buffer during turbulent times rather than being completely debt-free but without savings.
Having zero debt paired with no savings is unproductive because it leaves you completely vulnerable. A sound strategy is to manage debt repayment while simultaneously saving for emergencies and investing. If you stick to this approach long enough, you’ll find yourself with savings, investments, and no debt.
Subsection 1.1.1: Understanding Interest Rates
Section 1.2: The Financial Landscape
The average federal student loan interest rate currently stands at 4.12%, while private student loans can range from 6% to 7%. In contrast, the stock market has an average rate of return of around 10%.
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This article serves informational purposes only and should not be seen as Financial or Legal Advice. Always consult a financial expert before making significant financial decisions.