You’ve likely heard that you should save for retirement when you’re young. But, if you have student loans, paying off your debt may also be a goal. What should you prioritize? Should you pay off student loans or save for retirement? Here are a few ideas to think about.
Get Your Employer Match
If your employer offers a matching contribution to your retirement account, take advantage of this benefit. Your employer might, for example, offer to pitch in an additional 50 cents or $1 for every dollar that you contribute to a company-sponsored retirement plan, up to a maximum amount. This is “free money,” so to speak. If you don’t maximize this benefit, you’re leaving money on the table.
You might be thinking, “I don’t want to put money in my 401(k) because I’m afraid of the stock market.” Let’s take a moment to define a few terms: your 401(k) is an account and stocks are one of many types of investments that you might or might not choose to hold inside of that account.
Think of the 401(k) as the coffee mug, and stocks as the coffee. If you decide you don’t like coffee, you could choose to fill the mug with tea, water or juice, instead. You can often choose investments that align with your own risk tolerance.
Look at Interest Rates
Look at the interest rates on your student loans. If you have multiple loans, find out if you’re eligible to consolidate or refinance your loans into a single, lower rate. If you can’t, then you may want to consider making additional payments toward the student loan with the highest interest rate first, while making the minimum required payments on the other, lower-interest loans. By paying down the loans with the highest interest rates first, you’ll reduce the amount you’ll pay in interest over the long term.
Then, look at your budget to see if you have room to boost your retirement contributions — above the minimum amount required to receive your employer’s match — while also targeting your highest-interest student loan debt.
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Consider Motivating Factors
Financial management starts with self-awareness. Ask yourself, “Which option do I prefer?”
Does the idea of reducing your debt motivate you? Can you see yourself trimming your budget and directing the savings toward paying down loans?
Or, does the idea of directing money to a retirement account, and watching your investments grow, make you feel more enthusiastic?
By focusing on what motivates you more, you may be more likely to stick with your financial plan over the long term. The approach that gets you more excited is the option where you’re likely to contribute more, and therefore may make faster progress.
The Bottom Line
The good news? Paying down student loans and investing in your retirement are both good ways to help secure your financial future. By making both a priority, but placing the emphasis on the option that excites you more, you’ll begin to make progress toward your financial goals.