NEW YORK (CNNMoney) — I am 27 and just graduated from law school with about $175,000 in student loans. I have a good job, but am torn between working to pay off these loans quickly, or focusing on more equity-building financial decisions, like saving for a down payment on a house. Where should I allocate my discretionary income? — Lindsey
Lindsey’s not alone in trying to figure out how to balance paying off student loans with building wealth and saving for other important goals. Though not everyone is looking at $175,000 in debt, many young people are struggling to figure out how to invest in their future without drowning in student loans.
But debt — even in the six figures — doesn’t have to prevent you from following your financial dreams.
Don’t skimp on your rainy day fund
Before you start thinking about how to build equity or buy a house, make sure you’ve got some savings tucked away. Experts recommend having enough money saved to cover three to six months of expenses before making any other financial decisions.
It’s crucial to make sure you funnel something into a savings account, in case you lose your job or get hit with an unexpected expense like a costly medical bill or car repair. While skipping student loan payments isn’t recommended, you should stash away any money beyond the minimum payments, until you reach your emergency savings goal.
Figure out what matters to you
Next it’s time to put extra money to work for you. But what you do with it is entirely up to you. Some borrowers don’t like the idea of carrying debt for a long time. Others want to move on with different goals. The trick is to “identify, quantify [and] prioritize” your own personal goals, said Douglas Boneparth, a certified financial planner at Bone Fide Wealth.
If Lindsey’s spooked by the idea of stretching out her debt for decades, she might want to press pause on her plan to buy a home and throw all her extra cash toward the loans. But if becoming a homeowner is more pressing, she’ll likely have to deprioritize repaying her student loans and prepare to shoulder more debt.
Take a look at your interest rates
Whether you need to focus all your attention on your loans will depend a lot on your interest rates. High interest loans need to be paid off as quickly as possible. But if the rates are low enough that you could do better investing — say, 7% or less — you might want to just keep paying them off while investing elsewhere.
When it comes to paying off multiple loans, a good rule of thumb is to focus on paying the ones with the highest interest rates first.
On top of being strategic about which loans to pay off when, consider refinancing. If you’re confident you’ll continue earning at a high level for the next few years, you might want to up your payments now to reduce interest costs over the long term.
If the loans are federal, you may qualify for the Public Service Loan Forgiveness, a government program that could wipe out student debt after ten years. To qualify, you have to work for the government or a non-profit. But it’s worth noting that the program would be cut under President Trump’s proposed budget.
Divide and conquer
Make sure you’ve taken care of all essential expenses first, including your rent, utilities and minimum payments on loans. But once you’ve paid those essentials, what’s left is your cash for savings. You need to decide how much extra to put toward the loans vs. saving up for a home, or even a vacation, a wedding, or any other life goal you want to reach.
If Lindsey wants to start building equity now, experts recommend that she continue to chip away at her debt while saving up for a down payment. Financial adviser Arthur Ebersole of Ebersole Financial has a simple plan: “I would suggest that she allocate 50% of her monthly savings to pay off her debt,” he says. “By adding extra, even small payments each month, she can greatly accelerate the pay down of the debt.”
Ebersole points out that by reducing her debt, she’ll qualify for a higher mortgage loan — which will get her closer to buying a house.
Before making a decision, always consider the full costs of becoming a homeowner.
If saving up for a home seems overwhelming, you can always rent for a few years and revisit the plan later.