Should You Save for Retirement or Pay Off Student Loans? You don’t have to put investing on hold because you have student loans to pay off. You don’t have to choose between the two.
When you’re young and don’t make much money, it can be tempting to put off saving for things like an emergency fund or goals like retirement. But the power of compounding means that even putting away small amounts when you’re young could help you save a lot by the time you retire.
It’s not impossible to pay off student loans and save for retirement at the same time. Think about how important these steps are:
Pay the minimum amount of your loan.
Don’t miss payments. This is the most important rule for paying off student loans. Make at least the minimum payment on each loan and make sure the amount fits into your monthly budget. If you can’t pay the minimum, the Consumer Financial Protection Bureau can help you negotiate with federal and private lenders. Don’t think twice.
As you pay back your loan, you build your credit history, and if your adjusted gross income is less than $85,000 ($175K for joint returns), you may be able to deduct the interest you pay on your student loans from your taxes. So, making minimum payments on time has a benefit.
Put in as much as you can to your 401(k) to at least get the company match.
The next thing you should do is think about your qualified retirement plan at work. You should put as much money into your 401(k), 403(b) if you work for a nonprofit, or 457(b) if you work for the government as you can afford, up to the amount your employer will match. If you don’t put in enough (usually 5% or 6%) to get the match, you’re turning down “free money.”
Pay off debts with high interest rates
Credit card debt with a high interest rate can add up quickly, especially if you let the balance carry over from month to month. Start by using your credit card less and putting any extra money you have toward paying off your balance. You’ll be able to save more for retirement and other goals if you have less debt.
Set up a fund for emergencies
Things come up in life, and you should be ready for the unexpected. If you don’t, you might have to use your credit card or savings for retirement to get by when money gets tight. We suggest putting away at least three to six months’ worth of living costs as a safety net. Keep the money in a savings or money market account with a high interest rate so it can grow and you can easily get to it if you need to. Even if you only save a small amount each month, that’s better than nothing.
Think about getting a traditional or Roth IRA
You can put tax-free money into other types of retirement accounts in addition to or instead of a workplace retirement plan. You can save up to $6,000 a year in a traditional IRA and get a tax break right away. You can also save the same amount in a Roth IRA, but you won’t get a tax break today. Instead, you’ll be able to grow your money tax-free and take out tax-free withdrawals on qualified distributions in the future. Also, if you make less than $34,000 (or $68,000 if you file jointly), you may be able to get a Saver’s Credit of up to $2,000 (or $4,000 if you file jointly) for your IRA or 401(k) contributions.
Put the extra money to work
If you are lucky enough to have money left over, use it wisely. After you’ve paid off your debts and saved for yourself, you might want to put what’s left in the stock market. Investing is risky, and you could lose money on the market. However, in the long run, you may make more money from investment returns.
Student debt can be hard to deal with, but investing in your future is a good idea. College graduates can pay back their loans and save for retirement at the same time. You don’t have to pick between them.