How To Invest When You Have Student Loans

Lauren interviews Kristen Robinson from Fidelity Investments

Hey guys this is a very special week on tft and we have an expert interview for you and it’s all about investing saving and creating long-term financial goals for yourself when you have things like student loan debt to worry about this interview was filmed with the help of fidelity investments and we went to their offices here in new york to talk to the experts so

Check it out hi it’s lauren from the financial diet and today we’re here with kristin robinson she is the senior vice president of women and young investors at fidelity investments so my first question for you is what is the biggest misconception that young graduates have about investing well the biggest misconception is that they cannot save and pay down debt at

The same time they think it’s a very linear process and what we’ve done is we put together a point of view that really gives them six steps that they can use as a framework when they’re thinking about saving and investing at the same time as well as paying off debt we recommend that you first off get an emergency savings account together that’s typically three to

Six months of your monthly living expenses so that’s item number one item number two and this is really important if your employer has a 401k plan and has a match program where you allocate money and then they do as well you need to at least meet the minimum because if you don’t you’re leaving literally money on the table so what are a few fundamental things that

You need to start thinking about when you’re investing first of all you need to understand what asset allocation is now that may seem like a word that doesn’t really when you think about you might think i have no idea what you’re talking about but it’s really a very simple concept is that you have goals financial goals whether it’s your retirement goal whether

It’s saving for home backpacking in europe whatever your goal is and and what you need to do is you need to make sure that there’s so many different investment vehicles that you can select you need to really understand what your timeline is and what your risk tolerance is and you may be saying what is risk tolerance and what it is is that there’s different types

Of investment vehicles that you can you can use so for example someone who’s young who’s starting out they may go ahead and invest in stocks and bonds which may be viewed as a little bit riskier whereas if you’re rounding the corner to retirement you may end up put your money and knowing that you’re going to need that money in a few years and different types

Of investment vehicles so it really just depends on what your personal situation is but it’s important to identify those two what is your time frame and how comfortable are you so i’m someone who has student loans and i’m about to marry someone who has significant student loans so how can we make investing part of our lives with those student loan payments yeah

Well first of all you need to talk about it and believe it or not we actually did a study and we found that many couples do not talk about their money before marriage during and after in some cases so it really is important to spend the time on the front end putting together a budget and getting on the same page so that’s number one number two is you should really

Look at your debt after you’ve done the first two things that i talked about right which is you establishing the emergency savings matching your 401k and then you need to look at your debt and figure out which has the highest percentage typically private student loans have anywhere from five to twelve percent that you’re paying with regard to the interest rate and

Also you can look at your federal loans which are typically lower so so you should look at all of your debt though whether you have credit card debt whether you have student loan debt look at it look at what you’re paying interest and then prioritize your payment plan based on that you want to pay the highest interest rates off first so do you feel like having loan

Payments makes it difficult for young people to save it’s definitely challenging but i think that every bit counts at the end of the day and i’ll give you an example so say that you’re a 25 year old you’re making $40,000 a year and you increase your retirement savings by one percent say thirty-three dollars a month if you do that at the age of 25 then when you’re

Retired you’ll actually get about thirty eight hundred dollars a month so you save when you’re 25 thirty three dollars through compound interest and growth it actually be thirty eight hundred dollars if you do that when you’re forty five now it’s never too late but if you start when you’re forty five and again you take say fifty eight dollars a month of additional

Money in retirement that equals less than two thousand dollars so the difference between thirty three dollars at 25 five and $58 at forty five is really significant so even if it’s small that’s my point just start early one percent right so the younger the better so that you have more time absolutely yes time is on your science that’s sorry so how do you advise

A young person to structure their savings before investing well we have a budgeting rule of them that we’ve established and essentially we say all of your essential expenses such as your housing your groceries your phone we know that’s essential is about fifty percent you should target fifty percent of your income for all those essential expenses you should

Also allocate 15 percent for retirement now that may seem like a lot but again it’s you know people are living longer and it’s really important to make sure that you’re showing up your future early and and also you don’t typically see it so if you take that 15 percent out of your check before you’d even hit your account you won’t even feel it and then last is the

Five percent so we recommend that five percent is really saved to either put into your emergency savings account if you don’t have that established yet or take that five percent and really allocate it to those other financial goals such as maybe saving for a trip saving for a home whatever the case may be and so you have 30 percent left of your income to pay two

Additional student loans if you want or addition additional debt so you do have a little bit of leeway with that thirty percent to really chip away at those other financial goals so we here at tfd usually recommend about six to nine months of monthly expenses saved up would you agree with that yes generally we actually recommend three to six months of monthly

Expenses but i think that you can never save enough so we had a reader submitted budget which you can see here which kristen has already taken a look at and she’s going to comment on where someone could get started investing so i did take a look at him first of all i loved seeing that there’s a budget so that’s number one that’s great so we did look at it and as

I mentioned before our goal is really to have fifty percent of your income with essential expenses with this budget it was actually 67 percent with essential expenses but that’s okay i mean there’s going to be times right there’s a goal and certainly they can they can you know work to achieve and lower that but what we found that really stood out in that budget is

That there was no retirement savings and so if you think back to our guidelines 50% essential expenses 15% for retirement and so if you actually take that budget they did have money left and so actually if you did take that 15% and put it into a retirement account there is still $80 left for the month so pretty good yeah yeah so are there any painless ways that you

Can recommend for someone who already feels stretched then to make investing part of their lives are there any creative solutions that they could kind of start saving yeah there’s a few i think the first one is that automatically deducting money from your paycheck in two separate accounts has been very very successful so whether you’re saving for home allocating

A certain percentage of your your check there or if you’re saving for retirement just really allocating before you even see it in your checking account is there been a very successful way the other thing that i’ll highlight is and i’ve heard people do this is that they take their credit cards and they literally put them in their freezer and so if you can put an

Alert on your credit card you know okay i’ve hit my budget right now and i’m just going to put it away and you’re literally putting it on ice and i haven’t done it personally but i’ve heard that it’s a tip that definitely works so what are some of the right questions that someone would be asking themselves before investing to kind of assess their risk tolerance

What are some of the questions that they would ask their financial advisor so first of all really understand what you’re saving for and what the timeline is because that will really dictate what kind of investments you should be making for example if i’m saving for a home and i have a five-year plan to put away money for a down payment i’m going to invest that

And something that’s a little bit more conservative than say my retirement because with my retirement i know that it’s going to be many many years until i’m retiring so you really need to understand what your timeline is and then you need to really look at the different investment vehicles that are available and align it to that because there’s a lot of different