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Should I Pay Off Debts or Build My Emergency Fund?

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Budgeting is already a tough job. You need to consider what expenses should be dealt with first. Weighing your options, setting up a budget, and sticking to it can be pretty frustrating.

Should you pay debts or save?

Choosing between saving and paying off debt is not a clear “black and white” situation. This is especially true for young professionals who just started earning money while paying his or her student loans.

Should you pay the student loan, or should you build your emergency savings first? What is the best option for your situation? 

The ideal setup

The majority of financial analysts will tell you to pay off your debt while building your emergency savings.

This way, you’re chipping away your financial responsibilities little by little without sacrificing your ability to save for emergencies.

Pay Off Debt or Emergency Fund First: Solving the Dilemma

Unfortunately, this is only doable if you have a good source of regular income and a low amount of debt.

Take Note: not everyone has the same situation. A person might have a good monthly income but has tons of high-interest debts.

Meanwhile, someone might be earning lower monthly income, but are paying long-term, low-interest debts.

When to prioritize saving? 

Here are some considerations that might help you analyze your situation and make good decisions. 

If you don’t have any savings at all

An emergency savings account can give you a bit of time and resources until you figure out your next move. Paying your debt is only helpful if you have an established emergency fund that can support your basic needs for a few months.

What help would you get from diligently paying your debt when you might not have an excellent place to sleep the following month after? 

What Comes First? Emergency Fund or Pay Off Debt?

After paying out your necessities, save your leftover money into a savings account. Even if you only save little by little each month, these small funds will create a pool of savings that can help you get out of your financial problem. 

Answer: Start a small savings

Your employer offers 401(k) match

If your employer efforts a perfect 401(k) match program, you must take advantage of this opportunity.

People usually ignore their retirement funds, especially those who are just starting in the workforce. Why fund your retirement if you’re still young, and your retirement years are still decades away, right? 

However, it would be a missed opportunity if you don’t contribute when your employer offers a maximum match. It’s like turning away free money that can earn more money for you.

Not to mention how you will likely miss the effect of compounding interest, which can give you more earning capability if you start early. 

Answer: Max out your 401(k) and pay your debts down

If you don’t have job security

Job security has been shaky for many people in the past year due to the effects of the COVID-19 pandemic.

Those who have not deposited a dime on their savings account had it even worse than those with savings. The financial damage will even be more significant if you’re living from paycheck to paycheck.

Think of It This Way: if you try to pay your debts first, there is no telling what will happen next if you lose your job.

Answer: Start a small savings

Debt with low-interest rates

Debts can get out of control pretty quickly. That is one reason why most people try to get rid of their financial obligations as soon as possible.

After all, paying for high-interest rates can be a pain in the neck. However, if you have a low-interest rate debt, you might want to consider bolstering your savings first. 

Low-interest rate debts like mortgages and student loans can be a bit more forgiving. Its interest expense doesn’t skyrocket in the same way as high-interest financial obligations.

Holding these debts for a little bit to make your emergency savings account is worth the time sacrifice. Having a source of money when you need it is a better option. 

Answer: Build sizeable savings and then pay your debt

The ideal emergency savings amount

Ideally, you should aim for a savings amount that can support your necessities for at least three months.

If you can, aim for the optimal six months. The bigger your emergency savings is, the longer it can support you during challenging times. 

  • Add all your essential expenses (groceries, utilities, rent)
  • multiply the sum by the number of months that you want your fund to last (minimum of at least three months, ideally six months and up.)
  • Only add recurring expenses, and avoid those which are considered as “wants.”

When to prioritize debt payments?

Here are the times you must prioritize debt. 

If you’re paying a high-interest debt

Debts with high interest (payday loans, car title, and pawnshop loans) should be paid off as soon as possible. The high rate of interest expense can cripple your finances.

Another debt that needs quite a bit of consideration is credit card debt. This type of debt is notorious for causing people to overspend, resulting in a bill that has a high-interest rate. The longer this debt is left unpaid, the worse things can get. 

Answer: Pay off all your debt!

When your monthly income is certain

If you have a regular source of income, paying debt becomes more manageable. You can set up a budget with set payments that won’t affect your quality of life.

Once these debts are paid, you can finally start to save for your emergency fund. If the regular income is quite substantial, you can be able to save while paying for debt as well.

Answer: Pay off all your debt, but also plan a savings plan. 

Image credit: [KAROLINA GRABOWSKA]

Is an Ivy League MBA Program Worth the Debt?

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MBA programs, especially those from the Ivy League Schools, are viewed as a valuable asset for a young professional’s career.

However, the benefits of getting an MBA is starting to fall due to the rising tuition costs. For aspiring MBA students, making a cost-benefit analysis is an excellent place to start before making your decision. 

The Master’s Degree in Business Administration or MBA is a sought-after degree in business. Schools that offer this program give their students lessons about several aspects of running a business and making it successful.

If you’re an aspiring business owner or want to get a job at a prestigious company, an MBA can give you a bigger chance to achieve these goals. 

But MBAs are also universally known for being astronomically expensive. According to CNBC, MBA graduates from the best business schools would often rake up at least $100,000 in student debt.

https://hbr.org/2020/12/is-an-mba-degree-really-worth-it

If such debt is almost a requirement to get an MBA degree, is it worth it? When can you consider an MBA as a beneficial investment, and when is it not? 

The Cost of MBA Programs from Ivy League Schools

Ivy League schools are known for their slim admission chances and expensive tuition. These programs teach different business principles for the lucky few who are accepted.

Skills and experiences learned during the program can provide benefits that pay dividends for business professionals. 

According to GMAT, the cost of getting an MBA heavily depends on the school where you’re taking it and whether you avail student loan for it.

Out of all the Ivy League schools, only Princeton University doesn’t offer an MBA program. Here are the average prices for a full-term MBA in seven Ivy League schools. 

  1. Columbia Business School – $228,438
  2. Johnson College of Business – $199,250
  3. IE Business School Executive MBA – $135,000
  4. Harvard Business School – $225,204
  5. Dartmouth Tuck MBA – $224,000
  6. Wharton School Of Business – $223,2390
  7. Yale University SoM – $211,600

Students who don’t have enough financial resources can take advantage of various scholarships offered by different schools.

You can also seek financial aid using your merit if the school supports it. For example, Harvard offers need-based scholarships for an average of $84,000 each year. Wharton School of Business also provides military benefits for veterans. 

There’s Always the Unlucky Ones

Unfortunately, some students will not qualify for the need-based programs and other school-offered incentives.

Unqualified students who cannot apply for financial aid will have to seek help from other means. They can also reduce the cost of an MBA by doing it part-time or find a job inside the campus. 

If push comes to shove, you can apply for an MBA student loan to make repayment a lot more manageable later on.

According to CNBC, the average amount of student loans from MBA programs is about $66,300 from 2016 to 2017. Ivy League schools might need a bit more of that due to higher tuition fees. 

You can always set up a loan repayment strategy that will work for you until you’ve finally reached the MBA’s financial benefits.

Most MBA student loans are usually paid with a ten-year repayment plan. Before applying for another student plan, make sure that you can handle paying it with your undergrad debt, as well. 

Why Young Professionals Are Flocking to MBA Programs? 

Successfully acquiring an MBA is a challenging feat in itself. That’s why employers and business people see a lot of value in it.

Most student who finished their MBAs considers it “worth it” due to acquired technical and social skills that can help them further their careers. Attending an MBA class is also an excellent chance to build your network with your classmates. 

MBA classes can also teach business leadership and awareness of how the global market works. If you plan to create a business in the future, you might need this knowledge for greater expansion.

Since this program is a generalist course, you can also learn more about the different industries that affect a business.

https://menlocoaching.com/mba-applications-and-admissions-guide/is-an-mba-worth-it/

But the best incentive for young professionals to finish an MBA program is the salary incentive. MBA graduates are likely to get more job prospects than their bachelor’s degree counterparts.

Student Loan Hero reports that companies and establishments offer $105,000 of median base salary for recent MBA graduates. Meanwhile, people with bachelor’s degrees have a median salary of $65,000. 

Finally, most top companies in their industry usually hire MBAs to work with them. Hence, an MBA degree can give you a boost when finding a job in the competitive market.

Some Fortune 500 companies like Microsoft and Google even put billions on the table for hiring recent MBA graduates, especially those from Ivy League schools. 

The MBA-ROI: Are MBA Programs Really Worth It? 

According to GMAC’s research, 96% of MBAs who graduated in 2018 are very satisfied with the after-school value of their degree.

Additionally, when asked if they would take the graduate degree all over again, the answer of 90% of alumni is a resounding “yes.” Hence, it can be concluded that MBAs consider their degree as a good investment. 

The benefits mentioned in the previous section are significant enough for some aspiring MBA graduates to justify getting a loan to get the degree. However, the amount of debt after graduation is also substantial.

MBA student loans can affect someone’s finances in the long term. Its payments are expected to be included in someone’s finances for at least ten years. 

Having an MBA under your name is always an excellent addition to your resume. However, this doesn’t mean that you have will automatically get your dream job.

There is still no employment certainty, even if you have an MBA from a prestigious school. A hiring manager would likely recruit someone who has extensive experience in the field. 

Is there still a “return on investment” in getting an MBA? The short answer is: it depends. Not all MBA graduates experience the same success or failure just by having an MBA degree.

Meanwhile, some innovative people grasp their successes without an MBA. However, there are certain situations wherein an MBA is worth taking. 

When Is An MBA Worth The Debt? 

MBAs are still one of the most valuable graduate programs all around the world. However, there are MBA alternatives that focus on more specific careers.

The includes certifications like:

  • Master of Finance
  • Chartered Financial Analyst
  • Financial Risk Manager

All of these options are cheaper and take a shorter amount of time. Only get an MBA if the following factors apply to you.

If You Can Get It From Ivy League Schools

Ivy League schools are still some of the best educators all around the world. But the real benefit of attending an MBA on these educational institutions is the chance of growing your network.

Most MBA students that attend an Ivy League school are usually high-performing students. The experience can open up more doors for your career enrichment. 

If You’re Eyeing a Managerial Role

A manager needs to be a jack of all trades. Since you’re eyeing managerial roles (like being a CEO, supply-chain management, etc).

An MBA is like the ultimate Swiss Army knife that helps you get started in learning the ins and outs of an industry. 

If You’re Planning to Build Your Own Company

Along with networking, aspiring entrepreneurs will also get the benefits of learning proper leadership strategies and communication. These two skills are crucial to the success of a company. 

Image credit: [KAROLINA GRABOWSKA]

At What Age Should I Be Debt-Free?

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While most people like to think that things were much better before the pandemic, in certain aspects, they weren’t at all. Case in point, consumer debt.

Before the COVID-19 pandemic, the average American carried $90,000 in debt, according to Experian research. 

How much debt you have depends on several factors, including income bracket, ethnicity, education, and many more. However, one of the biggest factors is age. People in their 20s and 30s are far more likely to have student loans than those in their 50s. 

But at what age should you be free of debt? In your late 30s maybe? The mid-40s? Or is it in the early 50s, perhaps? We’re about to find out. 

Major Sources of Debt in America

These days, it seems like everyone is in debt. With the state of the economy, it certainly isn’t surprising. Reasons for this range significantly. Let’s take a look at some of the biggest sources of debt in the United States:

Bad Budgeting

Money management is a skill that you need to learn as early as possible. Bad budgeting skills can land you in a lot of debt. To improve money management, you need to analyze income constantly. That way, you’ll be able to adjust your spending habits properly. 

Divorce Settlements

Divorce is never pleasant. It’s also one of the main causes of debt in the United States. Between hiring legal professionals and the settlement, it can be a pricey lifestyle change. If you’re still not married, and you want to avoid this pitfall, you should consider signing a prenuptial agreement. 

Credit Cards

Before making any purchase, stop to think if you can afford the item in question. Never pay more than you have. It’s simple as that. In case using your credit card isn’t avoidable, try to only buy things that can be paid off within the same month. 

The Average Debt by Age

It’s a safe bet that if you’re reading this, you have debt.

How much debt do you have?

When you have debt, it’s better to compare yourself to other people in your age group than to the average American consumer. 

Where you are in life impacts how much debt you have, significantly. Therefore, you should only compare yourself to people in a similar stage of life.

Below, you can find a breakdown of the average non-mortgage debt by age in the US: 

  • 18 – 24-year-olds = $11,000
  • 25 – 34-year-olds = $27,000
  • 35 – 49-year-olds = $33,000
  • 50 years or older = $26,000

When can you hope to pay off your debt?

Realistically, you can hope to pay off your debt by 45, according to Shark Tank’s Kevin O’Leary. At 45, you’ll enter the second half of your professional career and you’ll be able to ramp up your savings for retirement to ensure a comfortable life. 

How to Be Debt-Free by 45

How can you pay off your debt by the age of 45? You need to take a proactive approach. People who have paid off their debt early would advise you to come up with an investment plan, and invest your money wisely.  

Of course, making smart investments takes knowledge. To gather that knowledge takes time and patience, not to mention money. But it certainly isn’t impossible. Here are a few ways you can tackle debt and be free before you enter your 50s (https://time.com/nextadvisor/investing/retirement/investing-paying-off-debt/): 

  • Create an investment plan as soon as possible. Streamline your accounts, automate where you can, and create a monthly budget before you get started. If you can’t pay all of your debt right away, start with the most pressing one, like high-interest credit cards
  • Try to approach investing with a sense of urgency. Your goal isn’t only to pay off your debt but to start building wealth early and to retire at a relatively young age. Create new spending habits, to make sure not to create any more debt
  • Diversify your investment portfolio as much as you can. Remember, even though a retirement plan is a good place to start, investing should be exciting. Therefore, diversify your portfolio. Find investments that are meaningful to you

Get Out of Debt and Start Living Free

If you’re in your late 20s and you have a significant amount of debt, there’s no reason to panic.

There are hundreds of thousands of Americans in the same situation. Car payments, mortgages, and student loans all cost a lot. But you can pay them off earlier than you think.

Image credit: [karolina grabowska]