So you’re fresh out of school and looking forward to contributing as a new hire to your firm.
During the orientation process they hand you an election form to determine how much you would like to defer to your retirement plan each pay period. Most of us have heard about how big a factor compounding and starting to save for retirement early plays in your ability to retire comfortably, but in the back of your mind, you can’t help but think about your student loans and how the money you would be contributing towards retirement could be going towards paying off your debts. This may be your situation today or one you found yourself in years ago and you still find yourself asking, “So, what should I do?”
The primary thing to keep in mind is that saving for retirement and paying off student loans does not have to be an either/or decision. The best plan creates a balance between these two objectives and the answer to this question won’t be the same for everyone as there are many factors that go into the decision. Three things to consider are:
1. Employer matching:
First and foremost, determine if your employer contributes towards your retirement. For example, your employer may match your contribution up to 3% of your salary. In a case such as this, you would want to contribute at least up to the match; otherwise you would be leaving money on the table.
2. Interest Rate on your loans:
Depending on how your education was financed, the interest rate on your loan will vary widely, and this rate will play a large role in determining where you should allocate your earnings. Let’s say the interest rate on your student loans is 2% – so for each dollar contributed you are in essence achieving a 2% return on your money. Compared to what you could earn by investing these funds, this percentage may be low. From a purely financial perspective, you want to allocate the majority of your money to where you can achieve the highest return, as in the end, this will leave you with the largest sum of money. Keep in mind the 2% (or whatever your loan rate may be) is guaranteed, while investing does come with a fair amount of risk. In reality, however, interest rates on today’s student loans will most likely be significantly higher than 2%, so you will need to do an assessment of where you believe you can achieve the highest return.
3. Long term goals:
Unlike the first two items on this list, this is not as cut and dry. Your income potential should be considered as well as your personal situation-are you saving for a first home purchase, supporting young children, or pursuing further educational goals? It is always helpful to look at financial decisions in the context of a comprehensive financial plan.
The reality of it is, a good majority of students graduating today are (and will be) doing so with student loan debt. Devising a plan to repay your student loans and begin saving for your future is a great first step towards financial success. Contact us today to take the first step.
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