You’ve Paid Off Your Loan! Now What?

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So all those loan payments you’ve been making month, after month, after month is like the flossing of personal finance – you just have to do it. If we’re lucky, it just becomes a habit.

But, do you have a plan for what happens when the bank sends a “thanks for doing business with us” note and you don’t owe any more money on your loan? (You know, after celebrating or at least hi-fiving someone.)

You may not want to change a thing. Hear us out

By keeping up with your loan payments you’ve kind of been in training to now take advantage of savings opportunities because you’re already in the habit of setting that money aside. If you’re in a position to funnel that money elsewhere, you could use it for priorities like saving for…

  • An emergency fund  (3- 6 months of living expenses)
  • A vacation fund (totally legit priority), or 
  • Retirement (always a good thing to save for)

If you’ve got other debts you’d like to pay off or put off certain expenses while you were paying down your loan, we get it. You may want to tackle those, and they deserve your attention.

But the overall idea we’re getting at here is that you may have the freedom to use all or some of this this money in a way that combines paying debt, saving for goals and living comfortably. This deserves some thought, because if you were making payments of $500 a month and deposited that same amount into a savings account, you’d have saved $6,000 (plus interest) by the end of the year.

Turn your monthly loan payment into a monthly savings strategy

What we’re talking about here is creating a list of priorities and goals. If you list a vacation first, no judgement. Go for it, and consider how you can create a vacation fund that has a little bit of extra cash in it before you’re ready to take off – find an account and APY that will work with your time frame. 

Some options … 

Automatic payments (to yourself)

Putting savings on automatic could make it simple to save because automatic transfers will send your funds to an account you’ve dedicated to saving. Automatically funneling your newfound extra cash elsewhere keeps it out of sight, out of mind, and earning interest. Calculate how much money you could save with automatic deposits (plus interest) using our savings interest calculator.

Annual Percentage Yield (APY) as of August 09, 2020. APY may change at any time before or after account is opened. Maximum balance limits apply. A maximum of six (6) withdrawals or transfer per monthly statement period are allowed.

This calculator is for illustrative purposes only and may not apply to your individual circumstances. Calculated values assume that principal and interest remain on deposit and are rounded to the nearest dollar. All APYS are subject to change.

Rates of the selected banks reflect New York savings rates for similar products at the select banks with a minimum balance of $2,500. Rates may vary by state and do not account for bonus, special or promotional APYs. National Average is based on the APY average for high yield savings accounts with a minimum balance of at least $2,500 offered by the top 50 US banks (ranked by total deposits). Rates of selected banks and the National Average as reported by Informa Financial Intelligence, www.informars.com. Informa has obtained the data from the various financial institutions that its tracks and its accuracy cannot be guaranteed. This calculator does not include all savings accounts available in the marketplace.

Our rate as of August 09, 2020.
Comparison banks’ rates as of July 21, 2020.
National Average rate effective as of July 21, 2020.

Opening or beefing up your retirement funds

If you’ve got a 401(k) plan at work, this could also be a good opportunity to check in with HR and direct more of your paycheck towards the annual maximum contribution limit. If you’re DIY-ing your retirement fund, automatic transfers can make it relatively painless to move the money from your heftier paycheck to your retirement account.

These are some of the options you may see and their 2020 contribution limits (not including possible catch-ups):

  • Traditional IRA – contribute up to $6,000 
  • Roth IRA – contribute up to $6,000 
  • 401(k) – contribute up to $19,500  
  • Sep IRA – contribute up to $57,000 or 25% of your compensation

Create a plan to track your progress

Who doesn’t enjoy a pat on the back for reaching a goal? We’re all for it, but let’s be honest – it can feel like we have to wait forever to get a reward for being financially smart. And forever is long. And maybe a little deflating.

So create milestones that feel meaningful to you and celebrate along the way. If your end game is saving $5,000 for a car or trip, you could break it up into goals like the first $50, $200, or $500 and then set another and another. If you’re saving for retirement, it’s the same idea – create a milestone, and watch for when you reach it and make some sort of fuss.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.