Conventional wisdom says that you should always put away money for retirement, even when you’re still young – and that it’s never too early to start saving for your financial future. Getting an early start on your retirement savings is one of the smartest habits you can develop, and can ultimately be the difference in long-standing financial security for you down the line.
But what if you’re saddled with student debt or loans, with the feeling that you can’t get out of it? The bottom line is that too much debt leaves you financially hamstrung, and it can be nearly impossible to make progress on other financial fronts when you have monthly payments to make. In fact, in the latest Allstate/National Journal Heartland Monitor poll, nearly three-in-10 young people who define themselves as just starting out, cited paying off student loans as their biggest financial challenge.1
Rising student debt is a huge problem confronting young people today, and given the escalating costs of college tuition, it’s not uncommon for recent graduates to owe several hundred thousand dollars or more. Tuition has increased at a rate higher than inflation for several years now, and the end result is higher student debt, and many young people trying to figure out just how they will pay off their loans.
However, all is not lost, and saving for retirement is not impossible when trying to simultaneously handle mounting student loans. In the following article, we’ll tell you how you can effectively save for your retirement, even while in debt.
The Value of Retirement Contributions
The value of retirement contributions cannot be understated. Retirement contributions almost always offer tax breaks, company matches, and future compounding that are worth far more than the interest saved by student loan repayments. Company matches in particular are a great way to save for your later years, and are basically like getting free money. Most employers offer some type of retirement plans – often with matching contributions on their end. Having a percentage of your income automatically deducted from your paychecks gives you the added advantage of eliminating any urges to spend the money before you can deposit it in your own account. Once the retirement account is set up and saving is automatic, it’s much harder to turn it off than it is to turn it on.
Make Only the Minimum Loan Payment
One great way to save for your retirement now is to establish a policy of only making the minimum student loan payment required. Let’s assume for example that the interest rate on your student loans is 6 percent. If the stock market returns more than that over the long run, then your money is much better off being invested for retirement, rather than paying for your loans. And when you consider the benefits of the tax deferred growth benefits and compounding possibilities that retirement plans offer, it makes it even more worthwhile to invest your money for retirement, and make only the minimum student loan payment required.
Another thing to keep in mind is that any missed payments can result in fees, additional interest, and a lower credit score. This is yet another reason to budget only the monthly minimum on your student loans.
Doing Both Is the Wise Choice
Student loans versus retirement does not have to be an either/or question, as both can be done if you manage your activity wisely. In most cases, it’s a good idea to pay off your student loans and invest at the same time. The earlier you start putting away money for retirement, the more time your money will have to grow and compound, and the easier it will be to build up a nest egg for your future. And unless your student loan debt is overly cumbersome, it’s always preferable to take this type of balanced approach.
Following the advice above, you’ll be able to map out a financial plan that allows you to simultaneously stay ahead of debt and prepare for the future at the same time. For most people, a good balance between the two will be whatever psychologically helps them achieve both goals and stick with them over time.
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