Welcome to “Ask Brianna, ” a Q&A column that helps 20-somethings prepare for the job search, handle money and manage student loans. Every other Wednesday, a new “Ask Brianna” will address these topics with tips I’ve picked up while writing about this stuff.
Maybe you were lucky enough to score a high-paying job right out of college, or you worked hard enough to earn a raise. Deciding how to spend extra money can be tough, though, when you owe thousands in student loans. This leads a lot of grads to ask:
I finally have a little extra money in my bank account every month. Should I put it toward my student loans or save it in an emergency fund?
There are golden rules in the personal finance world, and this is one of them: An emergency fund is absolutely necessary, even if you have a big student loan payment (and even if you live in a city where cocktails cost $15). An emergency fund is handy in an infinite number of scenarios: sudden job loss, car repairs, unexpected dental bills … the list goes on.
In fact, when you have no savings, everything unexpected is an emergency. A dedicated bank account will let you pay for sudden expenses without putting them on a credit card, which could rack up 15% or more in interest over time.
I advise building an emergency fund before paying any extra toward your loans. Continue making your minimum loan payments to keep them in good standing.
The amount you’re comfortable putting into your emergency fund is up to you. Here’s a three-step plan to get your emergency fund going and keep your student loans on track.
Step 1: Decide on an emergency-fund comfort level
First, take stock of your monthly expenses. Look back at your bank statement and credit card transactions for the previous month to see how much you spent on rent, food, bills, transportation and entertainment. Then decide how many months’ worth of expenses you’d like to have as a cushion.
Say you spend $2, 500 a month on average. Ideally, you’d keep at least three months of expenses, or $7, 500, in your emergency fund. If you can count on support from other sources, such as your parents or spouse, that amount might be enough. If you’re on your own, six months or more of expenses would be a better target.
But anything — even $500 or $1, 000 — is better than nothing.
Step 2: Make a plan to build up your emergency fund
Once you know how much you want to save, make a plan to do it. Very few of us 20-somethings have an extra $7, 500 or more lying around, so it’s OK to take several months to sock away the money you want to keep in your emergency fund.
- Set up an automatic transfer from your checking account. I had to rebuild my savings account when I got my first full-time job out of grad school. I realized the only way I’d make it happen would be to automate the saving, so I linked my bank accounts and created a fund transfer from my checking to my savings account right after each payday. Now I barely miss the amount I contribute to my emergency fund, since I don’t have the opportunity to spend it. I’ll stop the transfer when I hit my goal.
- Put away big chunks when you get big chunks. Think of your emergency fund first when you get a bonus or a raise at work, you get your tax refund or you get cash back as a perk for using your credit card. It’s no fun at first to put extra money toward savings, but when you need it you’ll be glad you did.
Army Emergency Relief (AER), often referred to by the longer title Army Emergency Relief Fund, is a non-profit, charitable organization independent of, but closely associated with the United States Army, founded in 1942. The organization is headquartered in Alexandria, Virginia.
The mission of the AER is to help US Army soldiers and their...
Federal Emergency Relief Administration (FERA) was the new name given by the Roosevelt Administration to the Emergency Relief Administration (ERA) which President Herbert Hoover had created in 1932. FERA was established as a result of the Federal Emergency Relief Act and was replaced in 1935 by the Works Progress Administration (WPA).
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