Home News Finance Paying Down Student Loans vs. Saving for Retirement: How to Prioritize

Paying Down Student Loans vs. Saving for Retirement: How to Prioritize

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When you have huge student loan debts and you are just starting your career, it can be daunting to choose whether to eliminate the debts or save for retirement. When you look at your principal amount, with interests that should be paid in more than ten years, it is easy to feel like the student loan will define your entire life.

This makes it pretty hard to make priorities about saving or debt elimination since you still want to enjoy your earnings and have a good time.

Good debt can be very helpful in making significant strides in life. For instance, education loans will help you get a good job after graduation. But the obligation to repay the funds means some money that could have been used on other things like emergency funds will be spent.

As research shows, most Americans are not ready to face financial emergencies. Now the question is how do you deal with all the demands? The tips discussed here can help.

Start building a solid framework to guide your financial priorities

This helps you get organized and have a deeper understanding of what you are undertaking and the motive behind. This alone will eliminate unnecessary financial concerns since there will be no room for guesswork.  

When you realize that you are on the right path to achieve relevant life goals, your mindset can shift. In turn, stress levels caused by money will dwindle and you will become more productive. To come up with the best strategy, you need to raise a few questions. It is always best to get a handle on your student loan.

  • How much is your student loan debt?
  • What do the interest rates look like?
  • What is the deadline for making payments?
  • What is the minimum monthly payment?

After that, consider the available options for retirement fund

  • Does your employer provide a retirement plan?
  • How easy is it to receive a match towards your retirement funds?

Make a plan to tackle the debt

When you start making payments towards a loan, the amount of interest accrued gets lower and your credit scores improve. To get started, you must understand the outstanding amount, interest rates, and monthly payments. According to www.realisticloans.com, It is critical to take note of the starting date and when you intend to pay back everything.

This allows you to create an automated payment strategy and most creditors provide this option. While this may seem like a set and forget method, it is far from it because it might be necessary to revisit the issue should your financial profile change.

At times, debt can trigger a negative outlook towards money and you can start feeling sorry for yourself every time you think about the borrowed money. This can be a huge distraction towards your financial freedom.

While this is quite subjective and has varied influences of different people, it is not uncommon to see people who are motivated by the emotions to clear debts quickly.

Kick start your retirement savings plan

As far as retirement savings are concerned, starting early is of utmost importance. The main idea is to be consistent in your savings and maximize the benefits of compound interest which result in significant savings after some years. This means you won’t have to work when you should be resting and enjoying your prime years.

One of the best tools you can use today is the 401 (k) plan offered by employers. Basically, you contribute money before paying taxes and the money grows tax-free until when the time comes to withdraw. When you have a higher balance, you earn more interest and your retirement fund gets “fatter”.

To get started, ask your employer if they have this program and whether it is possible to get a matching contribution. Ideally, the amount you contribute into your account receives a certain percentage match from the employer. Basically, you are getting money for free.

If your circumstances allow, make a contribution that attracts the maximum match. But if you can’t get a 401k plan, consider opening an individual retirement account.

Debt refinancing options

By refinancing your student loan, you stand a better chance of paying lower interest rates. Today, most people are paying between 6% and 8% in interests but there are still others who are charged more. Fortunately, you can get refinancing options which lower the rates to about 4%.

Irrespective of the nature of your student financing, there is a plan available for you. For instance, refinancing a federal student financing with a solution from a private lender will affect the flexibility. In addition, income-based payments and forbearance can be affected. While federal financing is not the most cost-effective on the market, the terms are quite flexible.  

The interest rates are crucial

If you still don’t know whether to save for retirement or pay student loans, take a look at the rates and compare that with the projected returns on investments. One thing about paid debt is that you are assured of some relief. Basically, the more you pay the more you lower the costs of borrowing.

If your student loan has an interest of say 5%, matching that with returns from investments after taxes can be very difficult. But if you have lots of time to invest till you retire, you can consider investing in long-term channels and earn interest. However, always bear in mind that the higher the interest rates of your loan, the higher the investment constraints.

Set up an emergency fund

To start with, have at least $500 saved in your account and gradually increase the amount to cover six months of your living expenses. Having an emergency fund can come in handy when you have to deal with unforeseen expenses. If you have spent most of your income on paying back borrowed money, you might be forced to charge that emergency expense on a credit card and this will be more expensive.

While it is ideal to have an emergency fund that can cover at least six months, some people may feel overwhelmed by this goal. To make things easier, make it your objective to save an amount that you are comfortable with. Nevertheless, this doesn’t give you the green light to neglect other financial obligations.

You can address both issues at once

The most important thing when creating your financial goals is that you are not obligated to spend all your money on debts, nor towards retirement savings. It is possible to plan your money and distribute it towards both goals.   

But having divided efforts can slow down your overall progress and maintaining a healthy momentum can also be an issue. However, you can overcome this by automating your retirement contributions and debt payments. After doing this, you won’t have to make the hard decision every other month.

In addition, you can control your spending to free up some money. Whether you resort to using cash instead of credit card or limit your overhead spending, the goal is to stay motivated to follow your plan.

Final words

When you are young and energetic, retirement may seem like a far fetched idea. Because every day brings you closer to retirement, it is prudent to start early even when the steps are small. By keeping your debt in check and contributing towards your retirement plan, a comfortable retirement will become a reality within no time.  

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