Graduated With $2.5k Pay And $36k Loan. How To Allocate Between Savings And Repayments?
Fresh out of college with debt
One of our community members asked the group on an honest case study with regards to his own personal financial situation which many fresh graduates face.
Let’s break it down!
Let’s call this anonymous contributor Alex who has graciously asked the group on his personal situation:
- Background: Alex is aged 25 to 29 years old and just graduated from a local university
- Income: Drawing a $2.5k monthly basic pay
- Debt: Student loan amounts to $29k left to pay
- Expenses: Supporting family with $500 a month with other daily expenses
- Savings: Currently stand at $2k
It is clear he/she is confused between the allocation between paying down of his loan and building up savings. What happened next was really interesting with over 14 different community members from different backgrounds sharing their views on Alex’s situation.
The Community Helps Out!
I’m going to use one of the community answers by Siti as a framework. It’s the best reply because she actually used and shared her own situation where she was in a worse situation but ultimately pulled through. Thank you, Siti for graciously sharing your thoughts! 🙂
You can view the full post here. If you cannot see it, simply press ‘join community‘ and we’ll accept you in!
TL;DR: Pay off as much as possible, educate yourself
“I went through a worse situation, as compared to yours; mine was lower salary, higher loans 90k for school, hospital/specialist medical, family expenses 6 young siblings and I live on own so I got my own set of utilities, bills etc too.”
Here’s what she did:
1) Buy Term Life, Personal Accident & Health insurance
- Especially important if your family depends on you as they will be covered, so you don’t need to come up with additional cash
- It was an important base for her to not put her family in further debt
- Term life: This is a purely coverage focused product, where all your yearly premiums (lower than whole life) go into coverage, so in case of death, your family gets paid the total sum assured
- Personal Accident: To cover outpatient accidental medical expenses
- Health (Hospitalisation and Surgical): This covers the really expensive Hospital and surgical bills and outpatient care, usually this is an enhancement to Medishield Life
Note: You can find out more about these plans for working adults to learn more before you buy from any agent.
2) Hustle and find side income jobs
- Which she did like telemarketing, personal assistant, door to door selling
- This was beyond her full-time job
4) Pay off debts as much as you can monthly as fast as possible
- But also set up a SAYE (Save as you earn) account, she started with $50 because she expressed her “dirt poor” situation
- But since you can start more, do set aside more
5) Invest in books and educate yourself
- Learn how to invest wisely
- Learn how to grow your network
6) Work hard and smart in your career
- This is mainly to work toward promotions
- And ultimately increase your earning power
7) Get more money-savvy, save and invest more
- As income increase and your debts lower
- Save and invest more
Final bonus advice: Trust me.. there is bright light at end of tunnel 😉
Further Reading: Other good community advice around clearing loan
Khuan Yew Cheah:
- If you’re paying around 5% to 6% interest on your student loan, it is best to pay it off first before you invest. That’s money out of your pocket every month.
- Next thing to do to clear your loan is to boost your income. Consider part-time work such as tuition or assignments.
- Get term insurance to cover your life protection and make sure you get reasonable coverage for your medical needs.
- Pay off your loan first beyond anything else
- Do u have any close seniors/mentors that can afford to help u pay off the bank and u pay them a lower rate of interest than bank?
- That would be Another way to look at it to clear the loan
- To me… a 3 prong approach.
- Live a frugal lifestyle > Return loan first > Save for rainy days
- After put aside the amount for saving/room rental/food/transport/allowance for parent/insurance, dump all other disposable cash into loan paying (include bonus/inventive).
- You may reward yourself with small portion of your bonus to get yourself in some short getaway in nearby countries.
- Live frugally but not dull before paying off all the TFL (Tuition Fee Loan). Keep yourself motivated and rewarded in some way you prefer.
- I went through a similar situation also, but for me, it was better cos I didn’t have to support my family with $500, I gave $200 only.
- In my opinion, don’t worry about saving up the buffer first, just pay off the student loan as fast as you can, however, if it’s a fixed monthly repayment that’s maybe stretched across 3 years or 4 years, there is a personal strategy I can share with you.
- Of course, do as what the rest have said, live frugal lifestyle, buy Hospital insurance so if anything happens you won’t be hit with another debt, and save as much as you can while repaying the monthly instalment for the student loan, these savings can act as both a buffer and to repay lump sum back to the student loan.
- Eg. you save $300 every month and at the end of 2 years you have $7200, this would be your buffer in case u suddenly get retrenched or whatever, at the same time treat this pot of money as your loan repayment money, once you accrue enough to one shot pay back the remaining loan, do it.
- So this pot of savings cater for 2 scenario, if within the course of returning the loan you get retrenched or can’t work, use this pot as a buffer to get you through till your next job, 2nd scenario is if everything goes well, as soon as the pot is equal to the remaining loan amount, pay it off one shot.