Q: I recently graduated from college and have $45,000 in student loans. I’m working a full-time job and am lucky enough to be living with my parents and saving money. I’ve been paying off my student loans from my work salary, but am wondering if I should also focus on putting some of my money aside for retirement, a savings account or a 401(k)?
A: I believe investing for your retirement is very important; but, right now, I want you to focus on one thing: Paying off that massive amount of debt.
You are doing exactly the right thing by living at home and using most of your income to attack that debt. If you stay at home and keep your expenses to a minimum, you could probably knock that debt off in two or three years.
I would recommend you put away some savings. Since you live at home, just aim to have about one month’s living expenses, which shouldn’t be too much since you aren’t paying rent, I hope. [If I were your parent, I wouldn’t charge you rent, since you are doing the right thing and paying off the student loans.]
Aside from your emergency fund, I want you to put $500 to $1,000 in a “life happens fund” to cover unexpected expenses, such as car repairs. While you are building up the two savings accounts, I want you to continue to aggressively pay off the student loans.
Once you’ve got the emergency and the life happens funds filled, stop saving and apply any money that was going to savings to the student debt.
After you are free from the student loans, continue to live at home. Now you want to focus on adding more to your emergency fund. Figure out how much it would cost you to live on your own and the additional expenses that would include. Then, save up six months’ worth of those expenses. At the same time, build up your life happens fund to include a rental deposit, cash for furniture or other things you might need to live on your own.
While you are still staying at home and building up your emergency and life happens funds, you can start putting money in your workplace retirement fund.
Here’s something else that can help you: Practice living on your own while living at home. Start putting away money as if you were paying market rent, paying your own utilities, etc. This will give you an idea of how comfortable you will be and let you practice managing your bills before you actually have to do it. From the financial safety of your parents’ home, you can see how well you can budget before getting out in the real world.