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Money Management Tips: Paying Off Debt vs. Investing Long Term

by Caldwell Trust

It is that exciting feeling of finally being out in the professional workforce and making enough extra money where you have some choices when planning your financial future. However, before you start putting in all those additional funds into your student loans, or begin looking to upgrade your home. You need to consider your overall financial situation and what your future goals are.

Related Blog: When is the Right Time to Start Investing Your Money?


Here are five important money management tips that can help you figure out what you need to do to manage your money as efficiently as possible. 


1. Savings, Savings, and More Savings

Saving for emergencies should be your top priority before you start making plans for your additional allowances. You need to ensure you have at least three months' worth of savings that can be used for emergencies. 

From there, you need to reserve 10% to 15% of your income to pay off any credit card balances. Only after you hit these targets can you start to figure out if you have any leftover money to invest in other accounts or pay off your student loans.

2. Pay Off Student Loans or Invest?

Even though it is everyone's dream to pay off their student loans as fast as possible, other financial goals should, in fact, come first- such as investing in your retirement. One of the best ways to figure out which is the better option for you, consider your student loan interest rate. If the rate is less than 6%, it may be in your best interest to put the extra money toward your retirement. Why? Because over the long term, your investments will earn more compared to the savings you incur from paying off those loans. 

Additionally, take a look at whether you have federal or private loans. Federal loans tend to have lower interest rates than private loans and come with many additional benefits. As a result, if you have federal loans, it may be more beneficial to focus on investing rather than paying them off. 

3. How to Balance Expenses?

Expenses are a way of life. However, trying to figure out how much you can afford for rent, groceries, and entertainment can be a tedious process for any young professional. If you want to learn how you can balance your expenses, consider the following:

  • 30% Rule: Generally, you should spend around 30% of your gross income on rent. Yet, even though it is a dependable guideline, you need to factor in the city where you are living. New York, for example, makes this rule rather hard to follow.
  • The 50/30/20 Budget: Another tactic that can help you implement a manageable budget is the 50/30/20 rule. This technique has you allocating your after-taxes pay to the following- 50% for needs, 30% for wants, and 20% for additional debt payments and savings. 

Even though these measures may not always work. If you use them as a general rule of thumb, you can figure out how much money you need for rent and other expenses. While also figuring out ways you can cut costs in other areas of your life. 

4. What Type of Car Should I Buy?

Typically, you want to make sure you spend less than 10% of your after-taxes pay on your car payment and less than 20% on overall car expenses. This includes things like insurance, gas, repairs, and maintenance. Figuring how much you can afford in a car before you head to a dealership can end up saving you hundreds if not thousands of dollars in the long run. 

Therefore, before you leave your car fate in the hands of a car salesman, run these numbers to figure out precisely what you are looking for.

5. When Buying a Home, How Much Can I Afford?

Before you start hitting up random open houses looking for your dream house, you need to slow down and figure out what and how much home you can truly afford. Most financial experts agree that individuals should not spend more than 28% of their gross monthly income on housing expenses. 

As your house will most likely be your most expensive and biggest purchase, figuring out your housing budget can not only be beneficial in regards to your home buying process but your overall money management plan as well.

If you need assistance with these money management tips or are looking to speak with a trusted financial advisor regarding any estate planning, investment management, or retirement planning—contact Caldwell Trust Company today. Let us help you achieve your ultimate financial goals and vision.

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