How to Build an Emergency Fund While Paying Student LoansFebruary 17, 2022
How to save and pay off student loans at the same time is a balancing act. When repaying student loans, you may find yourself only focused on that single goal. Prioritizing your student debt is crucial, but other financial responsibilities are equally important – like making sure you have enough money saved for an emergency fund.
But how do you weigh the importance of an emergency fund vs student loans? Let’s answer that question by going through some strategies to save for an emergency fund without neglecting your student loans.
Decide How Much You Need to Save
Before building an emergency fund, you need to know how much to save. Many experts say you should save three months of expenses, but six months may be more appropriate for some consumers.
The best answer depends on your particular circumstances:
- Do you work at a stable company or in an industry with good job prospects?
- Are you supporting anyone else, like a spouse, child, or aging parent?
- Do you have other sources of income beyond your job?
The amount you need for an emergency fund also depends on your personal risk level. Some people prefer to have six months of expenses even if they only need three. Saving more money is never a bad option.
Remember, there’s a big difference between three months of income and three months of expenses. You only need to save the amount necessary to live on each month.
Your expenses may include the following bills and necessities:
- Transportation, including car payments, gas, and car insurance
- Utilities, including cell phone and internet
- Health insurance and medical expenses
- Pet expenses
- Debt payments, including student loans, credit cards, and personal loans
Revisit your bank and credit card statements to find the amount you normally spend on these categories. Then, add up the figures to find an estimated one-month expense total. Multiply that amount by how many months of expenses you want to save. The final figure will be your emergency fund goal.
How to Save and Pay Off Student Loans
As you question how to save and pay off student loans, you may wonder about options for coming up with the money for your emergency fund. Read below for tips on how to build your rainy day fund.
Only Make Minimum Student Loan Payments
When you have student loans, you may feel the compulsion to pay them off before tackling other goals. But saving an emergency fund should always come first. Think of it like building a house. The emergency fund is your foundation, and if you don’t have a strong foundation, your home will always be in danger of crumbling.
While you’re saving an emergency fund, only make the minimum payments on your student loans. Once you’ve reached your emergency fund goal, you can start putting extra money toward your loans.
Open a Separate Savings Account
Putting all of your savings in one place is easy, but the best practice is to separate your emergency fund into its own savings account. If you keep the emergency fund in the same savings account that you use for Christmas gifts or summer vacation, you may end up spending it all on other expenses.
The emergency fund should only be used for catastrophes and unplanned events, like losing your job or visiting the ER. Plus, having a separate rainy day account will make it easier to see how much you’ve saved and how much more you need.
Keep your emergency fund in a high-yield savings account that has higher interest rates than traditional savings accounts. That way you’ll earn more interest.
Increase Your Income
Increasing your income and saving the difference is one of the best ways to save for an emergency fund. If you haven’t received a raise in a while, you might be able to ask for one at your current job. Show how you’ve taken on more responsibilities or how your sales or output has improved.
If you aren’t eligible for a raise, see if you can start freelancing or consulting as a side hustle. Make a list of all your skills, talents, and interests and brainstorm ways to monetize them. For example, if you’re fluent in Spanish, see if you can tutor Spanish students or offer basic translation services.
When you get a windfall, like a tax refund or year-end bonus, add the majority of it to the emergency fund. You can still set aside a portion for discretionary spending or other financial goals, but try to put most of it toward the emergency fund. Doing so will help you reach your goal faster without changing your regular spending habits.
Also, if you do get an annual raise, automatically funnel that extra money to your emergency fund before you get used to the higher salary.
Cut Unnecessary Spending
If you haven’t gone through your monthly credit card or bank statement, take a moment to examine your expenses. Note any services or subscriptions you don’t use regularly and cancel them.
See if you’re paying any bank fees, like account maintenance fees or overdraft fees. Switching to a bank with fewer fees will let you save money faster.
Negotiate Lower Bills
Before you start cutting take-out and streaming services from your budget, try negotiating some of your bills. You can often get lower rates for the following:
- Cell phone
- Car insurance
Call your current providers, mention that you’re a loyal customer, and ask if there are any deals for which you may be eligible. Tell them how much you earn; sometimes, providers offer special discounts for low-income customers.
Refinance Your Student Loans
If you have a high-interest rate on your student loans, refinancing could help you pay less interest. You can then add the monthly savings to your emergency fund.
Consider how much you could save when refinancing with ELFI.* For example, let’s say you owe $40,000 with a 10-year term and a 9% interest rate. If you refinance to a 10-year term and a 4% interest rate, you’ll pay $102 less each month. That’s more than $1,200 a year that you could add to your emergency fund.
When you refinance with ELFI, you’ll be matched with a personal student loan advisor to guide you through the process. As of February 2022, ELFI has a 4.9 out of 5 rating on Trustpilot with more than 1,700 reviews.
You don’t have to choose between an emergency fund vs student loans. Learning how to save and pay off student loans can be easy with proper planning.