Everyone is talking about the student loan forgiveness plan. And everyone has an opinion on the merits or demerits of debt forgiveness. Whatever your opinion, for those who will benefit from this gift, it would be great to see them take advantage of it by further improving their financial well-being.
Student loan forgiveness isn’t the only way people get unexpected freebies. These financial blessings can take many forms, including gifts from family or inheritance. But, while giving takes many different forms, they present the same opportunities and attractions.
Initial Thoughts Should Lead to Second Thoughts
When people first hear about an unexpected gift, they often think of buying something – a car, upgrading something – like their kitchen, or taking a trip. It might sound great, but now might not be the best time to splurge.
New cars are rare and used cars always command very high prices. We expect this situation to improve, but it may take some time. Contractors overseeing the renovations speak of higher procurement costs and a labor shortage. The pandemic has led to a significant increase in demand for home improvements. As new projects are completed, the backlog should decrease and price and labor shortages should ease.
Finally, travel today is beset by the challenges of flight cancellations, lost luggage, and the uncertainty of what would happen if someone in your party fell ill while abroad.
The lure of doing something with quick gratification is strong. Rather than fall into this trap, there are more productive uses for those dollars.
Pay off the debt
Starting in January, millions of borrowers who haven’t paid their student loans will likely have to start making payments again. The reduced payment amount resulting from debt forgiveness will allow borrowers to pay off other debts now. Look at your most expensive debt and consider paying off those loans beyond the required payments. For example, if debt forgiveness saves you $600 per month, send the $600 to pay off other debts, such as credit card debt or car loans.
Increase monthly savings
Savings from reduced student loan repayments can be directed to automatic savings plans. Increasing your 401(k) or 403(b) contributions is a good thing. If you don’t have either of these options, consider setting up an IRA, Roth IRA, or buying Series I savings bonds. The latter vehicle requires setting up an online account with the US Treasury. Current yields make them attractive although there are some hurdles to overcome.
My favorite action would be to add to a 529 account. If your college loan fees go down, you can redirect the savings to a 529 college savings account. Also, if you plan to attend more colleges or have a child who can, adding a 529 can help you with the costs that will arise later. Additionally, Indiana residents can take advantage of a tax credit of up to $1,000, which will increase to $1,500 next year.
The timing is also good
When you add retirement accounts or 529s, you are buying investments. However, with both stock and bond markets affected, buying is now at prices well below those at the start of the year. Although we never know when prices will rebound, we do know that in the past, buying at a discount has finally paid off.
Don’t try to make a splash
Although it may seem boring to some, paying off loans or increasing your savings are two approaches that can help you now and grow your nest egg for when you need money later. When you receive an unexpected gift, buying that shiny car or getting the modern kitchen that everyone seems to have is tempting. My best advice is to use this opportunity to improve your financial situation. Then later, with less debt and a larger wallet, it will be easier to afford this magical trip to Tahiti.
Bill Wendling is a Senior Portfolio Manager at Bedel Financial Consulting, Inc., an Indianapolis-based wealth management firm. For more information, visit their website at www.bedelfinancial.com or email Bill at [email protected].