One financial decision many people struggle with is whether to focus their energy and resources on paying off debt (which frees more of your income) or investing in retirement (which secures your financial future). With more than 43 million Americans responsible for $1.6 trillion dollars in student loan debt, getting free of debt burdens should be a high priority.
At the same time, the guarantee of Social Security benefits are questionable for many in my age bracket, making it imperative to invest in personal retirement accounts and other savings options. Both are equally important, so which should you tackle first? The answer depends largely on your unique situation.
Here are a few areas to examine as you consider which of these wise financial moves should be your first priority.
#1: Re-negotiate your student loan payments.
If you’re having difficulty making the minimum payment on your student loans, your primary focus should be on negotiating an affordable payment plan.
Thanks to the College Cost Reduction and Access Act of 2007 (CCRAA), many former students qualify for payments based on income, which can bring their monthly payments to as low as 10% of their total income. This can significantly reduce loan payments and enable you to not only pay off debt but have more income to invest in retirement.
#2: Re-finance if it makes financial sense.
#2: Re-finance if it makes financial sense.If you’re still struggling to see how you can afford to invest because of other debt such as your mortgage, other loans, or credit cards, consider if refinancing is right for you. I know interest rates are high but it may still make sense depending on how much interest you are paying with your other loans. Talk to a trusted financial advisor about your debt consolidation and refinancing options.
Look at your debt as a whole. At the end of the day, if you can come away with a lower payment and interest rate, it will free even more of your budget for investment options.
#3: Invest what you can, now.
Even though student loans and other debt may be weighing heavily on you, the truth is that the earlier you invest (ideally, in your twenties), the more you’ll take advantage of the compounded interest that comes with long-term investments.
Understandably, you might not be in a place to invest much if you’re still plugging away at debt, getting established in your career, or raising a family. But even a little can make a huge difference. One of the easy investments you should take advantage of is your employer-offered 401k plan.
Your 401k may not have the sexiest investment options available. Still, if your employer is offering matching funds, you’ll do yourself a huge favor by saving the maximum matched amount since it will be automatically doubled. It’s essentially free money for your retirement! Automatic payroll deductions make it even easier to budget this investment because you won’t have to think about it.
#4: Increase your investments as income increases.
Don’t just start a 401k or retirement account and forget about it. As you pay off more debt and your financial situation improves, increase your deductions or contributions and branch out into other options.
The wisest course of action is to focus more on stocks when you’re further away from retirement. As you get older, transfer riskier investments into more secure sources of income, such as certificates of deposits or bonds.
To put it in a nutshell, don’t let debt keep you from investing. No matter how much money you owe, there are steps to reduce your payments and make them more manageable so you can afford to invest. Even if you make small steps at first, your future will thank you for it.
Are you paying off debt or saving for retirement? What’s your strategy for these financial goals?
Editor’s Note: I’ve begun tracking my assets through Personal Capital. I’m only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it’s much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it’s free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.