When estimating how much you should put toward your student loan payments, a credit counselor might tell you to aim for 8% of your monthly gross income. But to get close to that number, you might find yourself budgeting until you’ve got the blues, trimming expenses left and right.
So what do you do when you run out of expenses to cut?
That’s the first of five reasons to spend more time increasing your income — and less scraping your budget — when attacking your loan debt or any other financial challenge.
1. Expenses are finite — income is not
We all need to eat meals, live under a roof and have access to transportation. Bare necessities like these cost money. Try as you might, you won’t be able to trim your expenses to $0.
By downsizing your living situation and making smaller cuts, such as to the cable TV cord, you might be able to remove $500, $1,000 or maybe even more from your monthly budget. But there’s a limit to how far frugality can take you.
Your income, on the other hand, has no ceiling. Sure, you might feel unable to earn a six-figure salary if you’re a public school teacher. But you could always change your circumstances through education, hard work and goal-setting. Some options for our hypothetical teacher include:
- Advance your career: Become an administrator, such as a school principal
- Start a side hustle: Teach online, tutor off-campus or write textbooks
- Open a business: Create a teaching academy or tutoring program
If you’re not especially passionate about your job and are aiming for a higher wage, you could also take the more drastic step of transitioning careers.
2. Cutting expenses won’t help you stay out of debt
Forgoing typical expenses can get you out of a jam. Say you need to come up with your minimum student loan payment: Skipping a dinner out with your friends could get you all the way there. That’s the beauty of budgeting. Take from here to help out over there.
But what if you struggle to come up with your monthly payment every month, not just once in a while? Well, then you wouldn’t be alone. Consider that two out of five American adults don’t have the cash to cover a $400 emergency, according to a 2018 report from the Federal Reserve.
Increasing your income can get — and keep — you out of financial jams. With more money coming in every month, you give yourself much more leeway to save up and can account for unforeseeable events like a job loss or medical bills.
3. Income affects your ability to manage your debt
By cutting “fat” in your budget, sure, you can meet or increase your monthly debt payments.
But increasing your income affects your ability to manage your debt, not just repay it.
If you have outstanding student loans and are hoping to refinance them to a lower interest rate, for example, lenders will want to take a peek at your debt-to-income (DTI) ratio. If your DTI’s out of balance, you could fail to qualify for low interest rates or be denied for the new loan altogether.
Some banks, credit unions and online student loan refinancing companies even require applicants to prove a minimum income to qualify. At top-rated lender Splash Financial, for example, you’ll need an income of at least $42,000, whether you have a lean budget or not.
4. Income helps you achieve ambitious financial goals
A budget-only approach ensures you live as affordably as possible. By prioritizing income, however, you can afford the lifestyle you actually desire.
For many people, the three big financial goals are saving for college, buying a home and investing for retirement. Others might have more unique goals, including funding their own business or traveling the world.
No matter your grand aspirations in life, you could view each of them as potential expenses. And it’ll be impossible to tack them onto your budget if your income hasn’t increased.
5. Income development takes more time and effort
By taking a money holiday, you should be able to create a budget and fine-tune it, canceling unnecessary subscriptions and negotiating your routine bills. It could take more than one day to downsize your car or lower your rent, of course, but these are relatively fast paths to saving.
Unfortunately, unless you receive an unannounced financial windfall, you’re not going to be able to increase your income as quickly. Even asking for a raise at work might take a while to hit your paycheck. Similarly, you might have to make a bit of an investment into a new side hustle before you start to see dividends.
Developing and diversifying your income takes months or years — some say it never ends — and there’s no clear-cut way for everyone to reach the heights they desire. If it’s going to be a long slough, even a worthy one, better to start now.
Where your income and budget work hand in hand
Of course, increasing your income won’t do you much good if you don’t already have a budget — or, ahem, spending plan — in place. It can help you keep more of your larger income.
If you were recently promoted at work, for example, budget to utilize your raise wisely.
Still, the argument here is to obsess less over your budget and more about developing multiple streams of income. Unlike the former, the latter comes with a cushion.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.50% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.49% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.48% effective April 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.49% – 7.27%1||Undergrad & Graduate|
|2.49% – 7.10%3||Undergrad & Graduate|
|2.53% – 9.06%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.49% – 7.11%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|