While living with student loans, it can be very difficult to save money. Indeed, student debt drains cash that can be used to achieve other financial objectives, and since student loans usually have insanely high interest rates, it might seem unwise to save extra money for an emergency fund.
However, everyone should establish a “rainy day” fund no matter how much student debt you have. All of us will face tough times during our lives when we will need to unexpectedly dip into our savings. At some point or another, many people will face medical or other life emergencies that will require you to spend a considerable amount of money. As such, having an emergency fund is absolutely essential, since this money provides insurance in case something in your life requires you to rely on your savings.
In my own life, even though I strived to devote the most cash possible to student loans, I always made sure that I had an emergency fund. I was laid off from the first job I worked after graduating from law school, and I was happy that I had my emergency fund to rely on while I was looking for a new gig. In addition, I drew from my emergency fund to pay for the funeral expenses of a family member who passed away recently. There have also been other situations in which I had to pay medical fees, moving expenses, and other costs that I did not anticipate, and I was happy that I had money saved up for a “rainy day.”
Some people might not believe that they need an emergency fund, and that all available cash should be used to pay off student loans. Many people might think they can rely on family members in an emergency, and as such, do not need to have too much money saved up for a “rainy day.” However, relying on family for money can create tension, and it is not certain that family will have the ability to help should you require financial assistance in an emergency.
In addition, some might believe that unemployment benefits might help if they cannot work and need money to get by. However, as I can attest to from firsthand experience, unemployment benefits will not always cover all of your living costs. As such, it is best not to rely on outside assistance in case you need financial help, and it is wise to save money in any emergency fund instead.
Reasonable people can disagree on how much money someone should save in an emergency fund. Most experts believe that everyone should have six months of living expenses saved in an emergency fund at any given time. This is probably a good amount, since it will likely take someone six months or less to find new work or otherwise recover from a financial emergency. In fact, I personally had six months of living expenses saved up for the entirety of my student debt repayment saga. Having this sum meant that I had to pay interest on the student debt that I could have paid off if I had devoted this money to my student loans. However, this emergency fund gave me security and peace of mind, and this sacrifice was well worth the benefit.
It can sometime be difficult to build an emergency fund when you are burdened with student debt, since so much of your income goes toward student loans. However, there are a few steps you can take in order to save money for an emergency fund. First, only pay the minimum amount due on your student debt until your emergency fund is established. This website will discuss in later articles how you should pay more than the minimum amount when you have extra cash, but saving money for an emergency fund takes priority over paying off student loans.
In addition, whenever you get extra income, devote it to your emergency fund. For instance, when I worked as a summer associate in law school, I devoted all of the money I earned to my emergency fund. I was living with my grandparents at the time, and I had minimal expenses, so I was able to build an emergency fund from my summer income. Saving this windfall meant that I could not lessen the amount I borrowed to pay for my last year of law school, but the security of my emergency fund was worth the sacrifice.
Furthermore, we all have other situations in our lives in which we receive extra money. For instance, many people receive bonuses annually, and any extra money you earn from this windfall can be placed in an emergency fund. In addition, numerous individuals receive tax refunds, and this cash can also be saved for a “rainy day.” Many people also receive gifts, inheritances, or other financial windfalls that could provide money you can use to establish an emergency fund.
All told, one cannot adequately assess student loan repayment options until you are financially secure. As such, before devoting extra cash to student debt, it is important that you build an emergency fund. Saving money for an emergency fund will mean that you will pay off student loans slower, and it will also mean that you will have to pay interest on the cash that you could otherwise devote to student loans. However, having financial security will be well worth the sacrifice.