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How to prioritize saving for retirement while paying off student loans

Kate Dore

June 14, 2019

When you are grappling with student loans and retirement is decades away, it’s hard to decide which one is more important. Seeing a lack of progress in either direction isn't a good feeling, and it's easy to become frozen with indecision.

While it may be tempting to double down on student loans, it won't pay off to ignore your other priorities. Your emergency fund, retirement savings, and high-interest debt deserve your attention too. Follow this cheat sheet to see where you should focus first.


1. Build a small emergency fund  


An emergency fund is the backbone of any good financial plan. Imagine it’s like the moat to your future castle of wealth — keeping your money safe from harm. A small stash may be all you need to avoid turning to credit cards in an emergency.  

Car repairs, speeding tickets, and pesky dental work always seem to happen when you least expect it. Without an emergency fund, you may be stuck relying on high-interest credit cards, which could derail your debt payoff timeline.  

Your end goal should be to set aside three to six months of living expenses. But for now, focus on saving the first $500-$1,000, and make sure it’s easy to access (hint: in cash!) This will be enough to cover you in a minor bind. Once you have achieved some other money milestones, you can add more. It will be easier as your financial stability improves.

2. Start saving for retirement

One of the painful things about being in your 20s and 30s is knowing the importance of investing — without the funds to actually do it. You know the sooner you invest, the longer your money has to grow, but student loan payments always get in the way.

The good news is, your company's retirement plan may be the secret to investing more. Some employers will match part of your 401(k) or 403(b) contribution. According to a recent Fidelity report, the average match is up to 4.1 percent. That’s 4.1 percent more money you could be missing if you don’t contribute.

By kicking in at least 4.1 percent — or whatever percentage your company matches — you can achieve three things: 1) get some extra "free money" from your employer, 2) boost your retirement savings, and 3) reduce your taxable income. That’s a triple win!

The money is deducted from your paycheck automatically, which makes it easy to save. You should set reminders to increase your contribution at least once a year. The perfect time to make an adjustment is after you get a raise because you won’t notice the difference.


3. Be strategic with your debt payoff plan


Note: Before you reach step three, it's critical to stay on time with your minimum payments. By missing even one, you risk owing extra money in interest, costly fees, and dings to your credit score.

Once your emergency fund and retirement savings plan are in motion, it's time to tackle your debt. Start by making a list of each of your debts. Make note of each interest rate. With the average credit card rate at 17.55 percent, you will want to attack those first.

Paying off high-interest credit card debt is a no-brainer — especially when student loan interest is usually less that 10 percent. But it does get a little trickier after that. The next best move depends on a few different factors:

  • Your interest rate(s) of each student loan
  • Your expected return(s) from investing
  • The tax benefit of keeping your student loans vs. saving for retirement
  • When you plan to retire


You may need to decide whether to refinance your student loans, which is a major — and potentially costly — decision. Moving from federal to private loans results in a loss of borrower protections, so it’s not a choice to make on a whim.  

Lastly, you may need to pick between paying off your student loan faster or investing. You may prefer the guaranteed "return" of paying off your student loans and saving on interest. Or, you may feel better knowing you have invested your extra money in the stock market. Despite what the math suggests, it's never the right choice if you can't sleep at night.  

   

Prioritize both retirement savings and paying off student loans


Early in your career, trying to be smart with money may feel like a fool's errand. There never seems to be enough cash to go around. Luckily, working on your student loans and retirement goals doesn’t have to be an either-or scenario.

A small cushion of cash may be just enough to stop you from adding any high-interest credit card debt. By keeping it under control, it may be more feasible to save more of your paycheck. At a minimum, you should contribute enough to get your company’s retirement plan match.

From there, you can strategically chip away at each of your debts, continue building your emergency fund, and eventually add more for retirement. Your progress won’t happen overnight, but if you celebrate small milestones, it will be much easier to stay the course.

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