Save in your 401k or pay off student loans? How to decide

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Updated on Friday, September 18, 2015


The definition of retirement is changing. The idea that you’ll work until you’re 65 then stop working for the rest of your life doesn’t necessarily make sense anymore. We’re living longer, and therefore it’s very difficult to save enough money by that stage of life so you never have to work again.

Not to mention, a lot of people find that work provides more than just an income. It offers a sense of purpose, an identity, which is beneficial to your life no matter how old you are.

So really the goal isn’t about retirement. It’s about saving up so you can live a financially independent life. This means you can choose to do what you want to do, rather than being forced to go into a job because you have to make money. The more you can you save, the more flexibility you have.

However, it’s challenging to save when you’re in your 20s and dealing with student loan debt – challenging, but not impossible. You just need a strategy to help you pay down debt and save for your future at the same time.

Building Out a Framework for Multiple Financial Priorities

The whole idea is to organize yourself, so you have a clear understanding of what you are doing and why. By doing this, you can remove the guesswork, which will help alleviate your financial concerns. Knowing you’re on track to achieve the goals that are most relevant to your life can do wonders for your mindset. Implementing this process may reduce stress around money so you can actually enjoy your life now.

There are several questions to ask in order to find the right strategy. Start by getting a better understanding of your student loan debt:

  • What is your total student loan debt balance (how much do you owe)?
  • What are the interest rates on your loans?
  • When must you start making payments?
  • How much are the monthly payments that you need to make?

Then, evaluate your options for retirement savings:

  • Do you have a retirement plan at work?
  • If so, will you receive a company match to invest in your retirement account?

Let’s take a look at how to address these questions and build a framework based on your answers.

Making a Plan for Student Loan Debt

Paying off debt reduces the amount of interest you pay on a loan — and it may even improve your credit score. To determine how to set up a basic repayment strategy, you need to understand how much student loan debt you have, what the interest rate is, what the monthly payment will be, and when you have when to start paying your loans. It’s also important to know when your balance will be paid off.

Once you know these factors, you can then set up an automated process to pay your student loans every month. Your student loan company should provide an option to set up an automatic monthly payment.

In a way, you’re setting it, but not forgetting it. You’ll need to come back to this process in the future as your financial circumstances change.

[Can’t cover the minimums due? Learn about Income-Driven Repayment Plans.]

And remember: debt is more than just a financial conversation. Your loans can cause you to develop a negative mindset around money because it may feel like a burden. You might make yourself feel “wrong” for having debt to begin with, and this distracts from taking action with your personal finances.

It’s okay to have these emotions, and you shouldn’t ignore them. After all, you’re human. Depending on how strong these emotions are for you, it may make sense to pay down your debt at a faster pace to alleviate that burden and stress. It’s a very subjective area, and it has to be approached on an individual basis.

Getting Started with Retirement Savings

When it comes to saving for retirement, or as referenced above, financial independence, it’s important to start early. The goal is to save consistently so you can take advantage of the compounding effect and build a substantial nest egg to tap into down the road.

We often hear this compounding effect referred to as compound interest, where you earn interest on your money and that interest then earns interest as well. When this happens year after year, your account balance has the potential to grow significantly. By investing now for your future “retirement” years, you can grow your retirement account steadily over time and not be forced to work longer than you have to.

One of the best retirement savings tools is your 401(k) plan at work. This is a tax-advantaged account that allows you to contribute money before taxes and grow it tax-deferred until you withdraw it after the age of 59 and 1/2. It’s a cool savings program because you’re providing yourself with an income stream later on in life. The bigger the balance, the more income you can generate from it, which contributes directly to your ability to achieve financial independence.

The first step is to ask your employer if you’re eligible to contribute to a 401(k), and if so, do they offer a matching program. This means if you invest a certain percentage of your salary into your retirement account, the company will match at least a small percentage of that. You don’t want to miss out on this because it’s basically more money.

[Sometimes a company 401(k) isn’t the best option. Learn why here.]

If possible, contribute enough of your salary to your retirement account to get the full employer match. If your cash flow doesn’t allow for that, start small (two or three percent). The important thing is that you just get started with what you can.

Don’t have access to a 401(k) plan? You can open an individual retirement account (IRA) on your own. From here, the same idea applies: look at your cash flow and determine what you can contribute each month. Again, it’s more important that you just start, even if just putting aside $10 a month seems pointless to you now.

Why Starting Today Matters

Building good habits is easier than trying to play catch-up later in life. Putting these systems into place is a big first step in managing your money so you can achieve your goals. Organize your financial life as you start out, so you can be present and enjoy yourself today while still planning responsibly for the future.

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