MADELEINE BRAND, host:
Average college graduates this spring will have about 20,000 dollars of debt. Should they begin saving for retirement or pay down that debt? What about that governments stimulus check you may have already received? Should you use it to pay off debt? Should you use it to pay off your car loan or save that money? Here to discuss your options for paying debt is Day to Day's personal finance contributor, Michelle Singletary. Hi, Michelle.
MICHELLE SINGLETARY: Hi.
BRAND: OK. This is your age-old dilemma, one that maybe you've talked about a few times on this show. You're in debt, should you pay off the debt first and then save, or save first and then pay off the debt?
SINGLETARY: The answer is both and it's interesting. We could talk about this every single week and people still don't get this, because so many people are in debt and they're so overwhelmed they don't know what to do. But here's the thing. You got to do both, you've got to save and you have to pay down debt. And when I say save I mean save for an emergency, save for your retirement. If you got kids eventually going to college, save for their college fund, but you've also got to pay down the debt.
So if you've got a little bit of money divide it by how many pots you need to. Put a little bit toward savings and some to debt because the thing is if you only throw it at the debt, if something happens and something always happens, you'll end up going into more debt to cover that expense. So say your car breaks down, you have no savings and you're trying to pay down a credit card debt, well what are you going to do? You're going to use that credit card. So you need to put something aside for the things in life that happen.
BRAND: OK. So you are a fresh out of college graduate. You get 1200 dollars let's say in gift money for your graduation and you have zero saving. What do you do?
SINGLETARY: You've got to save that money. Don't go buying any clothes. Don't, you know, don't go out dinner with the other graduates. Put that money away. You're going to need - any of us who've ever had our first job understand what it's like to really be out there without help from mom and dad, without the cover of college. So you want to build at least a three-month living expenses. Everything, rent, cable, car payment, especially those cell phone bills, you want to add all those up, multiply times three. That's how much you need to have in an emergency fund, so you need every penny of that money.
BRAND: OK. So let's say you've done that, you have your three months emergency supply. Should you then use money to pay down a debt or student loans?
SINGLETARY: Well you're not done saving for emergency just yet. I have talked to people about this and I've figured out listen, you need an emergency fund and something else I call a "life happens fund." That's for the car repairs, dental work - you know all the little things that you need to take care of. So you want to have three to six months living emergency fund and about 500 to 1000 dollars in the life happens fund to tide you over for those unplanned expenses.
BRAND: OK. So after you've done all that and you are a fresh new graduate. You also have student loans, you also have a car loan. Which one should you pay off first?
SINGLETARY: I would look at the terms for both and the interest rate. If both the car loan and the student loan debt are about the same interest rate which it could be these days, I would go after the car loan first, because if you're under a certain income threshold you can deduct some of that interest that you pay on the student loan debt. If you are above that threshold which many college graduates wouldn't, I'd probably go after the student loan debt. But overall just have a plan. If you've got an extra 200 dollars a month, throw 100 at both to pay it down. And for those new graduates out there and those parents with the student loan debt, don't keep this debt around like it's a pet. So definitely get rid of that student loan debt as fast as you can.
BRAND: Personal finance expert, Michelle Singletary, writes The Color of Money column for The Washington Post. Michelle, thank you.
SINGLETARY: You're welcome.
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