For young professionals starting their first job, managing finances can be tricky, especially if there’s an education loan involved. The common question is: Should you focus on paying off the loan completely before investing, or can both be done simultaneously? Experts suggest a balanced approach to handle debt while building wealth for the future.
Prioritize Loan EMI Payments
When you start earning, repaying your education loan EMI should be your first priority. Ensuring timely payments not only maintains your credit score but also prevents financial stress. Additionally, under the old income tax regime, you can claim deductions on the interest paid on education loans, reducing your overall tax liability. This tax benefit can only be availed if the loan is active, making it unwise to pay off the loan entirely with a joining bonus.
Use Joining Bonus Strategically
If your employer provides a joining bonus, it can be a valuable tool for financial planning. Instead of using it entirely for loan repayment, consider creating an emergency fund. An emergency fund ensures that you can continue paying EMIs even if you face unforeseen job loss or financial difficulties. Ideally, this fund should cover 3–6 months of living expenses, including your loan EMIs.
Invest While Managing Loan Repayment
Financial advisors recommend starting investments early, even if you’re repaying a loan. Setting aside a small portion of your salary for investments can help you build long-term wealth. Systematic Investment Plans (SIPs) in mutual funds are a great option for beginners. With SIPs, you can start investing with as little as Rs.500 per month and gradually increase the amount as your income grows.
Benefits of a Dual Approach
By repaying your loan EMIs and investing simultaneously, you can enjoy the following benefits:
- Wealth Creation: Early investments benefit from compounding, helping you build a larger corpus over time.
- Tax Savings: Active education loans offer tax benefits on interest payments under the old tax regime.
- Financial Security: An emergency fund ensures that you can manage loan repayments even in tough times.
Consider Prepayment with Higher Income
As you progress in your career and receive salary hikes or switch to a higher-paying job, consider prepaying a part of your loan. Prepayment reduces the overall interest burden, allowing you to become debt-free faster. However, ensure that prepayment doesn’t compromise your investments or emergency savings.
Balancing loan repayment and investments is key to achieving financial stability. With a well-thought-out plan, you can pay off your debts while creating a secure future.
