With forbearance student loans, I invest with a robot-advisor
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To alleviate financial insecurity from the coronavirus pandemic, the US government has automatically forborne student loan payments until September 30.
For me, that means I now have a few hundred extra dollars added to my budget each month. I have also been fortunate enough to keep a job, which means my financial reality is less dire than many others.
But, instead of sending the money I would have spent on my student loans to my high yield savings account, paying off my loans anyway to try to move forward, or spending them, I invested all of that plus some of my savings.
The main reason is that for me, as for many of them, the pandemic and the associated financial crisis made me urgently understand the need for financial security – or at least a plan for it. financial security.
I invest for financial goals beyond the next 3 to 5 years
I already use a high yield savings account, so my money earns a small amount of interest just by staying intact in my account, but I know I will earn more by investing it now when I have little significant expenses. I might be new to investing, but I know the basics: it’s most effective if you start young, so your money has the longest possible trail to grow and multiply.
While the benefit of a high yield savings account is that it keeps your money close at hand or, to speak of the industry, very liquid – so you can pay for immediate needs like down payments and emergencies – the annual percentage return of mine is still much lower than the average return of the stock market. And if you don’t need the money in three to five years to, say, buy a house, experts say investing may be a better option to consider for increasing your wealth than a savings account. high yield alone. You take risks when investing, but you may have more to gain.
The interest rates on my student loans are low, so investing will help my money grow more
Like many people, my natural instinct with debt is to try and pay it off as fast as possible. But sometimes it’s just not the most strategic plan. Going debt-free might seem like the main way to be truly financially stable, but sometimes the decision to pay off low-interest student loan debt earlier than expected can be more emotional than logical if it forces you to default. opportunities to save. retire or grow your nest egg in stock exchange, where your extra money grows faster in investments for the future.
“The interest rate on most student loans is generally low, and it can outperform in the long run in the stock market when you accumulate savings up to a rate of 8%,” the advisor said. Tom Canale wealth management. told Business Insider. “I would rather accumulate at 8% than focus on paying down debt at 6%.”
So I did the most obvious homework and compared the interest rates on each of my student loans with the average stock market return. The highest interest rate on my student loans is 5%, and the historical average stock return is double. Although past performance does not predict future returns and is only an average (meaning returns could be much lower or much higher), I was able to earn more on average by investing money instead of paying off my student loan debt ASAP.
As I have no plans to buy a house or pay for a wedding in the next three to five years (and live happily in my mother’s basement again during the pandemic) , I can get by with less
. So I left enough money in my savings account to cover my rent for the remainder of the lease – three months – and a lump sum for unforeseen emergency expenses. And I decided to invest the rest with monthly transfers of the same amount that I usually send to pay off student loans.
Whether I finally take the money out to pay a down payment on a house or just leave it on the stock market until I retire in the hope of beating inflation, I know I will need this money for something in the future.
I used a robo-advisor for a cheap and easy to invest entry point
As a newcomer with relatively straightforward finances, I has selected a robot-advisor for my investment accounts. Robo-advisers are automated, personalized investment services for their clients based on algorithms with minimal or no human interaction. They provide a cheap and easy entry point, and I was encouraged by the articles like this one by a former bank manager. I emptied the money into the account and let the app do the work.
And, since I was on a roll, I finally managed to invest most of the money in my HSA for retirement, too. Health savings accounts are triple tax advantage: You can contribute to your HSA before paying federal taxes, and you get an income tax deduction, as well as being able to invest and earn tax-free interest.
So far, I am happy that I have chosen to invest to increase my wealth and move one step closer to better financial security, in addition to my high yield savings account and my 401 (k). With the money I usually send to my checking account, I’ve always been able to donate to charity and pay for my daily expenses. I left enough in my savings to cover emergencies and the rest of my lease, and the rest of my money works harder for me in an individual investment account that I pay very little for a robot to manage.