I’m excited to introduce a new series that features questions that my clients have asked me. If you have a question you’d like to see answered in my blog, I’d love to hear from you! Here’s the question that’ll kick this all off:
Your Question:
My Answer:
Simply put, you should pay it off as quickly as possible given your income, your other financial priorities and spending on essentials. Here’s how to do that.
Consider your income
A balanced budget allocates around 20% of your net income (after-tax, or take-home pay) to your financial priorities, so the higher your income when you enter the workforce, the more cash you’ll have to throw at the debt. For example, if you earn $30,000 after-tax you would set aside $500 per month for paying down your loans.
Know your priorities
That being said, it’s not necessary to allocate all of your financial priorities spending towards student loan repayment. You can feel good about setting aside a portion of this money to save and invest for your other goals so long as the income that you’re earning from your investments is more than the interest you’re paying to carry your debts. It’s always a good idea to have more money coming in than going out!
Over the long run, you can plan to earn an average of 6% on your investments. If you’re carrying costs from your student days on your credit card at 20%+, you’ll want to prioritize paying that down before anything else. If the interest rate on your student loans is lower, say around 4-5%, you can consider starting to save and invest for your future. Compounding interest is a magical thing and it’s smart to start getting this to work for you right away.
Living with the parents?
The last piece to consider is how much your essentials are costing you (a place to live, food to eat, getting to work etc.). This chunk of your budget should be around 50% of your take-home pay, but if you find yourself in a living situation that costs you less than this you’d be wise to allocate the remainder of this spending category towards your debt.
Your Smart Steps
- Be grateful. This is [simple_tooltip content=’Debt that will help you make more money in the future. For example, a mortgage enables you to buy a home, which will likely be worth more in the future. Or, a student loan which enables you to command a higher salary.’]”good debt“[/simple_tooltip] that enables you to earn more in the future. It also provided you with a great experience and the opportunity to expand your skill set.
- Make a plan to pay it off. Set a goal date and calculate the required monthly payment; adjust until you find the sweet spot balancing timeline and affordability. Then set it and forget it by automating those payments through your online banking bill payment function.
- Throw in some extra money. Allocate a portion of every [simple_tooltip content=’A bunch of money that you didn’t plan to receive, such as lottery winnings, a birthday gift or an extra bonus at work.’]windfall[/simple_tooltip] (such as a birthday gift or annual bonus at work) against the debt. Aim for at least 20%, but no more than 80% of the bonus money. You should be responsible, but have some fun too! ☺
Lisa Zamparo is a financial strategist and lifestyle optimist, as well as a Chartered Professional Accountant (CPA), business coach and personal finance expert in Toronto who helps people make intentional decisions with their money. As a one-on- one coach, her personalized approach to financial planning helps her clients achieve their goals by aligning their spending with their priorities. As an inspirational educator, Lisa leads workshops that infuse mindfulness principles with financial concepts delivered in a fun and approachable style.
