The following question has been edited into a Q&A format and some details may have been changed to keep our listeners’ information anonymous. Let us know what you think in the comments below, or if you have your own question, use the ASK P&B button!

Hi guys! I recently discovered the podcast and love it. I’m a 25-year-old living in San Jose, CA. I recently wrapped up my commitment with my job and completed my master’s degree, and now work in nonprofit development. Because my previous commitment allowed my student loans (~$45,000) to go on forbearance and my interest was paid for me, I’ve just begun chipping away at my loans.

I earn $52,000/year and work a second job yielding an extra ~$500/month. Given I live in a city with the ridiculous cost of living (we’re talking $1500/month in rent for half of a 2br/1ba apartment) and that I started as a teacher with a significantly lower income, I’ve spent my adulthood until now pretty much getting by and saving nothing. Now that I’m in a slightly more comfortable place financially, I’m reflecting on how I should be using the $500/month I’ve budgeted to make loan payments and start saving. Though my minimum payment on my loans is only $270 (the only debt I have), I’d like to be paying more. Should I be paying a full $500/month, or should I be making closer to minimum payments and begin saving?

Thank you for the email. The traditional recommendation is “establish 6-months of expenses” in savings and then pay off your debt. However, in the real world, this can take somewhere between a long time and forever. After all, if we all had extra cash to save each month, then we wouldn’t be in debt in the first place. My recommendation would be to set aside $1,000 (or two months of your $500/month) in savings for unexpected expenses. Be sure to replenish this amount if you ever have to use the $1,000 for an unexpected emergency. Another way to establish your savings fund is to set aside 20% (or all) of your tax return each year. This recommendation assumes you have a secure job, which it sounds like is the case based on what you’ve described. If that assumption is incorrect, then you’ll want to follow the traditional recommendation of establishing 6-months of emergency savings.

Should I use my extra income to pay off my debt or start an emergency fund?

After reaching a modest savings of $1,000, allocate your $500/month in full to your loan payments. Keep in mind that loans are trickier than credit cards for most people because although you’ll be paying off your loan faster, yet your monthly payment remains fixed. This is unlike the tangible benefit you get with a credit card where you can watch your minimum payment decrease month-to-month. Because budgeting sucks, most people need to see an immediate or quick benefit to stick to their budget. This is why staying consistent on loan payments can be more difficult. If this concerns you, set aside $500/month in a savings account and pay a “lump sum” every 3-6 months to get the win/win benefit of simultaneously: 1) establishing an emergency savings fund; and 2) earning interest on your savings between lump sum payments. Every 3-6 months, electronically pay a “lump sum” on your loan. If you’re not sure what products might work best, we discussed some online accounts and other financial product options on PB53: Broke Millennial ft. Erin Lowry you can use.

Lastly, if you want to test various payment options that I haven’t covered to determine your exact payment amount and payoff date, my favorite debt calculators are available for free on BankRate.com. We hope these scenarios help and best of luck on your journey to debt freedom!

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