Dear Carrie, I'm 24 and came out of school with $80,000 in college loans. I've been luckier than most of my friends and have a full-time job, but I'm wondering whether I should pay off my loans before I start saving for retirement. What do you think —A Reader
Dear Reader, This is a great question and absolutely timely. With total student loan debt now topping 1.4 trillion dollars, there's real concern about how this debt is preventing young people from buying a home, saving for retirement or starting a family.
But it doesn't have to be this way. It all depends on how you prioritize. You — and every graduate who's struggling with debt — can make choices on how to pay down your loans that will help balance past obligations and future goals.
Obviously, you have to pay at least the minimum on your student loans and never miss a payment. But beyond that, you can create a system to stay on top of your loans while at the same time contributing to your financial future.
Student loans often offer flexible repayment options and low interest rates, and the interest may be tax deductible, meaning it may not be advantageous to pay it off aggressively at the expense of working toward other financial goals.
From my point of view, your top saving priority should be retirement. So once you've accounted for the minimum payments on your student loans, here's how I suggest you prioritize your savings and payments:
Contribute enough to your company retirement plan to take full advantage of your employer match. This puts extra money in your pocket.
Build an emergency fund to cover at least three to six months of essential expenses.
If you have a credit card balance or a car loan, focus on paying those down next, starting with the highest interest loan.
Save more for retirement. Because you're starting now, you should be in good shape for retirement if you can save 12-15 percent of your gross salary throughout your working years. (Those who postpone starting to save for retirement have to increase this percentage.)
I believe these points are important for everyone. Once you have a handle on them, you can tackle other goals according to your personal needs and preference.
—Save for a child's education.
—Save for a home.
—Pay down other debt, including your student loans.
—Save even more. Once you have money saved beyond your emergency and retirement funds, add to your long-term savings in a taxable account.
These final four savings priorities will evolve as your life changes. The main thing is to keep saving even while you're paying down your student debt.
As you look ahead, it's also essential to understand that saving for the future and investing for the future are two different things. Saving means putting your money in a safe place—for example, in a federally insured bank account. You won't get a big return, but when it comes to your emergency fund or any other money that you know you will need in the next one to three years, safety is paramount.
When you're preparing for a goal that's many years out, it may be appropriate to invest some of your money in the stock market so that you have the potential to outpace inflation. Don't hesitate to consult with an investing professional as you build a diversified portfolio.
Don't get me wrong. It's great that you're focusing on paying off your student loans right away. As you figure out your other savings and payment priorities, you'll want to continue to keep a sharp eye on them. To make it easier, organize your loan documents so that you always know the amount owed, interest rate, term of the loan, minimum monthly payment, and repayment date. A simple spreadsheet should do the trick.
Also explore repayment options. Federal loans have more repayment alternatives than private loans, including graduated repayments, income-based repayments and public service loan forgiveness. Consider consolidating loans to possibly lower interest rates and monthly payments.
Finally, put as much as you can on auto-pay — monthly bills, including student loan payments, and your savings. Your 401(k) contributions automatically come out of your paycheck, but don't stop there. You can set up automatic transfers from your checking to your other savings accounts as well. Once you have money to invest, you can even direct your savings automatically into a brokerage account to start building a diversified portfolio.
I give you a lot of credit for taking your student loans seriously, and for thinking about retirement this early. If you can handle both, you'll be putting yourself in a better position to not only enjoy the benefits of your education, but also to handle whatever the future holds with greater confidence.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at [email protected] Information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investing involves risk, including loss of principal. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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