It’s a tale as old as time, a question that stumps nearly everyone who encounters it, and one that doesn’t have a clear answer,
Should you pay off debt or invest?
On one hand, debt holds you back from your goals, so you want to ditch it as soon as possible. On the other hand, investments help you build wealth and reach your goals, so you don’t want to wait too long to start.
What should you do when you’re faced with both?
You will need to manage and prioritize competing financial goals and responsibilities throughout your life. And these can be tough decisions!
A balance that many people are dealing with right now is paying off their student loans while still saving for retirement. On the surface, it may seem like funding both is merely a pipe dream.
But it is important to remember that these goals, among others, are not mutually exclusive. With proper planning and a strong debt repayment plan, you will be able to contribute toward both and set yourself up for financial success.
- You can still save money with debt. Let’s repeat that: you can still save money when you have debt.
- Create a comprehensive debt repayment plan and brainstorm smart ways to lower your balance.
- Through your debt-repayment journey, be sure to prioritize investing for retirement, even if it’s a little at a time. With compound interest, a little can go a long way.
- Find a balance between debt and investing that works for your short and long-term financial goals.
Let’s look at a few ways to prioritize investing for your future self while still paying student loans.
Create A Debt Repayment Plan That Will Get Your Student Loan Balance To $0
Student loans are certainly in flux.
Based on government intervention, federal loans have been in forbearance with 0% interest since March 2020, which has provided much-needed relief for many borrowers during the pandemic. The current administration recently extended the repayment deadline to August 31, 2022, but there are talks of it getting pushed once more into the November election season.
No matter how you look at it, student loans are a big deal. With the average student loan debt climbing upwards of $40,000 (federal and private loans) per person and exceeding $1.747 trillion total, it significantly impacts many new graduates and seasoned professionals since it takes the average borrower 20 years to pay off their student debt.
Whether you’re in search of permanent employment—it’s undoubtedly an excellent time to be a job-seeker—or have a steady paying job, it may seem like repaying student loans should be the only goal that you focus on.
But before you redirect all of your resources into your debt, haul out your repayment plan and ask yourself,
- How many student loans do you currently have?
- What are the corresponding interest rates?
- How long will it take you to pay off the loan based on your current savings rates?
- Does it make sense to consolidate or refinance your loans? (Be careful with federal loans, as these actions could make you ineligible for particular repayment plans).
- What are you doing with the money you allocated for your loans while they’re paused?
With the pause in student loans, you may have forgotten how they fit into your plan. Now’s a great time to remind yourself of your outstanding debt and see if there’s a more strategic approach to paying them off.
Just because you don’t have to pay your loans every month doesn’t mean you shouldn’t plan for when the payments re-start again. Since your payments have been on pause for over two years, you might have redirected some of that money to other goals like retirement, emergency savings, or simply your monthly cash flow.
But what will that look like once the bills come due? Be sure you have enough money saved and allocated for those payments when you have to start making them again.
The Department of Education has announced so many changes recently, from revamping the public service loan forgiveness program (PSLF) to retroactively helping borrowers who have been hurt by their income-driven repayment plans. It’s worthwhile to evaluate if any of these changes could impact you.
With all of the updates, the debt repayment plan you made a few years ago likely won’t serve you the same way today. Take time to reevaluate your debt picture.
- Did you accumulate additional debt during the pandemic (house, car, etc.)?
- Are you prepared to start repaying your student loans when the time comes?
- How can you make the most of the pause in student loans to help fund other goals?
It’s important to be adaptable and adjust your debt repayment plan when needed.
Keep Retirement Top of Mind
Odds are you won’t want to work forever. It’s more and more common for people to strive toward a work-optional lifestyle, where they don’t have to work full time to make ends meet.
Research from Benefits Pro shows that people are planning to retire earlier. More than a third of respondents say they want to retire by 55 (you can’t even start collecting Social Security until 62)!
With the push for early retirement and a more flexible approach to work, it’s critical to consider saving enough to financially support that vision long-term. A lot of people are concerned about having the resources they need to sustain their ideal lifestyle without a steady paycheck, and many aren’t saving at a rate that will allow them to do so.
While Social Security may help, it won’t cover all of your expenses, making personal saving an essential part of your financial future.
Even though retirement may seem like a far-off place now, prioritizing saving for retirement today will give your investments time to compound.
An excellent place to start is with your workplace retirement plan (401k, 403b, 457, etc.). In 2022, you can save up to $20,500. Even if you can’t max it out, try to increase the percentage you contribute each year. Remember, as your income increases, your savings should, too.
Does your employer offer a match? If so, ensure you’re contributing enough to qualify for the match, usually 6% of your income, to add even more to your growing nest egg. You can also look at contributing to both a traditional and a Roth 401(k), should your plan allow it. Investing in a mix of pre-and post-tax accounts can help give you more flexibility and options when retirement comes.
Your workplace isn’t the only way to invest for your golden years. You can also look at individual retirement accounts (traditional and Roth), health savings accounts (HSA), brokerage accounts, etc. The mix of investments that are right for you will depend on your goals and values.
Find Balance Based On Your Financial Goals and Values
Your financial goals set the tone for your entire plan. They help inform where and how to invest and give you ongoing drive and motivation to put you on the path to success.
Even though it might be challenging and require some custom planning, you can work toward multiple financial goals simultaneously! It’s all about finding a balance that works for you today and yourself in the future.
Our team at AVID is passionate about helping people manage their finances to enhance their goals and dreams. Debt repayment and long-term saving goals are often a big part of that conversation.
Are you lost on how to start saving for retirement or paying off your debt? Give us a call today. We would love to create a custom plan that helps you!