This website has previously discussed how student debt borrowers, and pretty much everyone else, should save money for emergencies. It is important to have some cash stashed away in case you are laid off, face medical issues, or experience a number of other problems in your life. Most experts advise individuals to put six months of living expenses aside for emergencies, but this does not all need to be in cash. Indeed, individuals should invest available money whenever possible so that their money is not just sitting around failing to earn interest.
The first time I ever thought about setting up an emergency fund was during my last year of law school. I worked as a summer associate at a law firm the prior summer, and I earned a respectable amount of money. Since I crashed with my grandparents throughout that summer, and did not have many expenses, I was able to save almost all of the money I earned as a summer associate.
At first, I did not want to invest available money. Throughout my adult life to that point, I never had much money, and I could not rely on family members to assist me financially if any life issues arose. As a result, it was comforting to know that I had a sizable amount of money saved up that I could rely on if I had financial issues.
In addition, I was also nervous that if I were to invest available money, I might lose some of the funds that I invested. During the Great Recession, I witnessed firsthand how fortunes were eliminated because of economic issues. Many people I knew were getting killed in the stock market, and their investments were worth less than the money they originally deposited into investment accounts. I was worried that I might lose my emergency funds if I decided to invest this cash.
However, I kept thinking about inflation, and how my money was actually decreasing in value every day that it sat in a savings account. Furthermore, the interest rate for my savings account was laughably low, and this did not even come close to making up for the cost of inflation. As a result, I decided to make a compromise and invest available money to a certain extent, and keep some money in cash so that I had money readily available if I ever needed it.
I ultimately decided to invest half of the money that I had in my emergency fund and keep the rest in cash. Of course, your circumstances may be different, and some people may be able to get away with investing more while others need easy access to cash. The amount of money that you invest depends on your appetite for risk and a number of other factors.
Fortunately, during my student debt repayment saga, I never really had a major life emergency such that I had to liquidate the investments that I had in my emergency fund account. As a result, this amount was allowed to grow, and since I invested these funds during the economic recovery, the funds grew substantially in value. The only time I liquidated some of this money was when I made the final push to pay of my student loans. I really wanted to be debt free, and it was worth it to liquidate some of my investments (and pay taxes) in order to be completely free from student loans.
It should be mentioned that when you invest available money, you do not need to invest the money exclusively in stocks. Indeed, a number of different investment vehicles exist that can fit everyone’s situation. Bonds, mutual funds, and other investment options offer different types of risks and rewards, and student debt borrowers do not need to simply invest their money in the stock market.
In addition, now more than ever, investing money in a variety of different investments is easy and simple. For instance, many robo-advisers allow investors to invest money almost seamlessly. Robo-advisers also allow investors to make investment choices based on their goals and income rather than specifically deciding the types of investment vehicles. In addition, some of these robo-advisers allow investors to contribute to their investment funds on a recurring basis, and some of them place a small sum of money into the investment account whenever certain types of transactions are made on a credit card or debit card.
Although there are a number of robo-advisers out there, Student Debt Diaries suggests that student loan borrowers go with Accorns (sponsored link). Accorns allows individuals to make lump sum deposits into their investment accounts, and sets up investments based on the goals of an investor rather than more specific choices. The thing that really distinguishes Accorns from other services is that it also allows investors to set up recurring deposits, and contribute money to their account each time a transaction is made on their credit or debit cards. This makes it easier to build up a fund if you do not have cash stashed away in the present.
In the end, it might seem as if student debt borrowers should keep a sizable amount of cash in reserve. However, student loan borrowers should invest available money like emergency funds whenever possible. In this way, you can make sure that your money works for you while stashing away resources you can use if you face a life emergency.