So I’ve Refinanced My Student Loans – Now What?November 29, 2019
By Caroline Farhat
Congratulations! You just made the big step of refinancing your student loans. Your wallet is fatter and you’ve likely shaved off thousands of dollars from what you will have to pay on your student loans. That’s a huge achievement that will positively impact your financial life.
You may be tempted to use your new found moolah on brunches and vacations, but don’t start spending lavishly quite yet. While present you may be saying “yes!” to fancy dinners, future you would really benefit from spending this extra cash in a smarter way. If you’re feeling financially empowered, you’ll love these five financial tips for what to do after you refinance to maximize your money.
1. Reexamine (or create) your budget
Any time you have a change in your financial situation, such as a raise or a new recurring bill, it’s important to evaluate your current budget. If you don’t already have a budget, getting a little extra money each month can be a great motivator to start one. We’re fans of the zero-based budget system. With zero-based budgeting, you allocate each dollar you make to a specific expense or goal so it can help curb unnecessary expenses you may regret later. For example, say you bring in $4,000 a month after taxes. You spend $3,000 on fixed expenses such as rent, utilities, and food. Your monthly payment for student loans is $600, leaving you with $400 extra each month. Under zero-based budgeting, you would allocate the extra $400 to other goals (such as contributing to a savings account) or wants (such as a travel budget). Once you have figured out exactly where each dollar will go, you should set up an automatic transfer to a savings account so that you never get tempted to spend money that you should be saving.
Of course, budgets aren’t one size fits all. If you have a method that works for you, then use that! The important things to know and keep track of are:
- How much money you have (after taxes and health insurance payments)
- Your essential fixed expenses (such as housing, utilities, food, student loan payments)
- Your non-essential fixed expenses (such as gym memberships, Netflix, etc.)
- Your long-term financial goals (buying a house, saving for a child, retirement)
- Your short-term financial goals (dining out, travel)
2. Start or pad your emergency savings account
If you don’t have at least three months of living expenses saved up, you need to start right now. We don’t want to set off alarm bells, but an emergency savings account is the number one thing everyone needs to have on their financial to do list. Depending on your situation, you may benefit from stashing away six to nine months of living expenses, but start with at least three months and build from there. Be sure to have this money easily available, so put it in a savings or checking account that does not incur any fees or penalties for withdrawing money. For example, you do not want to put your emergency savings in a CD, even if it will yield you a higher interest rate, because getting your money out can be a costly and sometimes time-intensive process. That said, find a savings account that will pay you interest so you don’t lose all your earning power on that money.
3. Pay down other high-interest debt
After you have a healthy savings account, paying off high-interest debt should be your next priority. Just like how refinancing your student loans helped you save money in the long run, paying off debt with high interest rates such as credit card debt or a personal loan will help you shave off hundreds or possibly even thousands of dollars that you would have to make in interest if you just paid the minimum monthly payment. Even putting an extra hundred dollars a month to this debt can pay off big time in the future. Additionally, lowering your debt load can help bolster your credit score, especially if you are carrying a lot of credit card debt. Your debt-to-income ratio is critical if you want to get a mortgage or other big-ticket items so paying down high-interest debt can only work to your advantage.
4. Contribute to your retirement
Say you have a healthy emergency savings, you’ve paid off all of your credit cards, and you have enough to cover your living expenses with a little bit of extra fun money. First, congrats! That’s a big feat and you’re killing it with your finances!
Set your future self up for success is by starting or increasing your contribution to a retirement account such as a 401(k) or IRA. Retirement accounts benefit from compounding interest so the sooner you start, the better. Plus, many employers have matching programs that help you pad your retirement account. Remember the free money you can make from a high-interest savings account? This is similar, but your future self will be the one to reap the benefits.
5. Treat yourself, responsibly
If you have refinanced your student loans, it’s safe to say that you’re clearly on top of your financial game. Let’s be real — there will always be a list of things you can and should do with your money. But it shouldn’t all be about the work. You deserve to treat yourself! Just be sure to do it responsibly. Should you suddenly move into a budget-busting luxury penthouse apartment? Probably not. But you absolutely should treat yourself to that nice dinner or new pair of sneakers you’ve been eyeing. The keys to a successful financial life are staying informed and staying balanced. Just like any other goal, providing little rewards along your journey can help you stay motivated. So take this as our encouragement to enjoy yourself! Just do it responsibly with an eye on your financial independence.