Emily Pandise has covered business, tech and media for NBC News since 2017. In her early 20s, she realized she had no idea how to manage her money, so she set out to change her financial habits and learned a lot along the way. Now, she wants to help others do the same with this column, "Ask a Finance Whiz." You can find her on Twitter and Instagram at @emilypandise.
Dear Finance Whiz,
This question is potentially life-changing! I graduated from college a few years ago and have about $73K in debt from private student loans. I pay about $900/month for student loans, which are at 5% interest, but I have a little over $20K in a money market. I recently came into some money from a stock that was set up when I was a baby. It’s about $70K.
So, theoretically, I could pay off my entire debt and be debt-free before 30! But my parents are saying I should save and use that money to buy a house one day (not really something I want any time soon) or a new car when my older car probably goes in the next few years. They say that being debt-free isn’t necessarily a good thing as making payments helps my credit score (which I agree with). I’m torn between having great savings at 24 OR being debt-free before 30. What is the best thing to do?
I have a great credit score due to paying off the loans on time and I have a few credit cards that I always pay off on time. I keep getting different messages when I ask my family, friends and financial advisors for advice.
Debt-Free or Down Payment?
As difficult as this decision may seem, let's take a minute to appreciate that this is a good position to be in! Before you do anything else, make sure you have an emergency fund (a few months’ worth of living expenses) set aside if you don’t already. Emergency funds are a vital way to protect yourself should anything go wrong with your financial stability.
You’re young and seemingly managing your debt very diligently. If you’re paying off your credit card bills on time and in full every month, you are showing the credit bureaus that you’re a responsible borrower — that will help keep your score high. Making payments on time is the “good thing” for your score, not the debt itself. Your score could take a temporary ding once you finish paying off your loan, but that isn’t a reason to hang onto it longer than you need to.
Other things to consider: You may owe a capital gains tax on your stock earnings and could walk away with less than the full sticker amount. Your debt is likely too new to be impacted by either presidential candidate’s proposed student-loan-forgiveness policy, but that’s worth looking over before you make your final call, too.
I don’t know your full financial picture or the precise terms of your loan, so I won’t tell you exactly what to do. But if I were in your shoes, I’d make the decision by calculating the interest I’d pay on the loan if I waited and compare it what I’d earn on the money if it was saved or invested instead. (There are free online calculators that can help you crunch the numbers.) For the latter option, you could put that $70K in a high-yield savings account or CD (likely 1-3% interest, low-risk), or invest it (7% returns, give or take, but higher risk).
I’ll bet that it saves more money in the long run to pay off the entire loan now, avoid accruing more interest and funnel at least some of that $900/month that you were paying toward debt into a brokerage account or high-yield savings to build wealth. Who knows — if you keep paying down your debts, making smart saving moves and investing smartly, you could be debt-free and have great savings by 30.
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