After several years of work, you may find yourself wondering if you are making the best choices with your finances. The first few years after college are often spent getting accustomed to the regular paycheck that comes along with the job as well as building an emergency fund and figuring out your company’s retirement program. Once you reach the point where you are comfortable paying your bills each month and you have a little set aside, you may be looking for ways to strengthen your financial position. Before making any decisions, it helps to look at your priorities. If homeownership is something you are considering in the next few years your choices will look different than someone who is hoping to live debt-free or someone looking for early retirement.
Student Loan Debt
Student loan debt is something that many people have but most have little idea what to do with. If you make your loan payments each month, you may try to avoid thinking of how much longer you will be paying or if there are other options. If this sounds familiar, look into student loan consolidation from Earnest. When you consolidate your student loans, they are rolled into a single product through a private lender. Private student loan consolidation has several benefits. You have more options in consolidation than you did when you took out the original loans. A longer repayment term will lower your monthly payments, as will consolidating at a lower interest rate. If your credit score is higher than it was when you were a student, which it is for most people, you can drop your interest rate significantly.
Prioritizing a House Purchase
If the thought of homeownership is attractive, there are some financial moves to make now that will benefit you later. Protecting your credit score should be a priority. While lenders will offer mortgages for those with lower than ideal credit scores, the difference in interest rates between good and fair credit scores is significant and can cost you thousands of dollars. The good news is, it is always possible to refinance your mortgage. If your credit score is less than ideal, refinances after a few years will allow you to take advantage of your improved score. Build a savings account dedicated to providing a down payment for your home. Providing 20 percent down on a home used to be the standard when qualifying for a mortgage. That is not necessary today, but that doesn’t mean a significant down payment is not beneficial.
A larger down payment allows you to skip the private mortgage insurance that comes along with not having a significant amount of equity in the home at the time of purchase. This insurance is paid monthly and included in your mortgage payment. You can drop PMI once you reach the threshold in equity, typically 20 percent. In addition to saving for your down payment, a dedicated savings account for unexpected expenses is a smart move. The unexpected costs of homeownership begin before you even make your purchase. The buyer is typically responsible for covering the costs of home inspections. While you may luck into buying the first home you have inspected, it doesn’t always work out that way. This savings account will also come in handy at closing, where you may have some expenses to cover. Once you are a homeowner, continue to contribute to this fund for inevitable costs, such as HVAC or roof replacement.
Remain Debt Free
Not all debt is bad. A mortgage provides you with a place to live, and student loans finance your education. However, credit card debt and personal loans are taken out to cover emergency expenses are not smart financial moves. If you have existing debt, prioritize paying that off as soon as possible. Depending on the amount of debt you have, the idea of paying it off in a reasonable amount of time may seem impossible. There are a few different ways to attack the problem. If you have a good credit score, look for a balance transfer credit card. Transfer your higher interest rate debt over to the balance transfer card. You may be able to find a zero-interest rate option, but even saving several percentage points makes the debt paydown more doable. The key to success with this method is resisting the urge to spend on your cards. Once you transfer the balance, you need to put your existing cards away. It is best to leave the accounts open, as closing them will harm your credit score. If you don’t think you can resist the urge to spend, go ahead and close the accounts. If a balance transfer is not feasible, there are other options.
The two basic choices are to start with the card that has the highest interest rate, and the other is to start with the card that has the lowest balance. There are advantages to both. Paying off the card with the lowest balance first, and then moving on to the next, allows you to pay off cards in full more quickly, which can provide powerful motivation. You will pay more interest this way, but the motivation of seeing that zero balance may be worth it. The other method of tackling this debt is to start with the card that has the highest interest rate. Once it is paid off, move onto the one with the next highest, and so on. Whichever method of paying off your cards you decide on, continue to make the minimum payments on your other cards during this time and don’t use them.
If you find yourself struggling to avoid putting expenses on your credit cards as you pay them off, find the reason. Are your monthly expenses too high? If you are barely making ends meet, putting fuel and groceries on a credit card may seem unavoidable, but it only keeps you deeper in the hole. If your charges are the result of impulse purchases, look for other ways to spend downtime, whether it is exercising, picking up a new hobby, or spending time with friends outside of the mall. If you are generally good about only using your card for emergencies, but find yourself facing emergencies a little too often, work on building an emergency fund. Pay only the minimums on your cards for a few months, and sock everything else into a high-yield savings account. Use this money when an emergency crops up, rather than putting it on credit.
