For most of my late 20s, the most pressing financial question on my mind was, Should I save for retirement or focus on paying down my student loans? So many of my friends seemed focused on getting their debt paid off — at least once a month I would see a celebratory post on social media by someone who had paid off at least one of their student loans. My own loans weighed heavy on my shoulders and I couldn’t wait to shake them off. But as someone working in the retirement planning industry, I knew all too well the value of investing early in your career. It seemed like a financial tug of war I just couldn’t win.
Then, I stumbled across a video that Jean Chatzky made in partnership with Fidelity that addressed this exact question in under five minutes. Jean patiently listened to a real person’s story and the rationale behind their tough financial decision and gave them a verdict. In the tug of war between saving for retirement and paying off student loan debt, she had a seemingly simple answer: Can’t you work on both? Given the relatively low interest rate of federal student loans and the possibility of matching funds available at an employer, it made sense, in most cases, to tackle these two goals side by side.
This week I want to talk about some of the different tug of war financial decisions we face and how to tackle them:
Saving for Retirement vs. Paying Off Student Loan Debt
Winner: Both
As long as you have federal and/or private student loans with interest rates below 10%, pursuing both goals is a solid strategy, particularly if your company offers matching funds. If your employer offers a match, invest at least enough to meet the match. If your employer doesn’t offer a match, consider how much you might be able to contribute towards your retirement while still being able to work on paying down your student loan debt. For instance, if you have 12% of your salary budgeted for savings and/or debt repayment, you might start by putting 6% toward retirement and steadily grow your contribution by 1% each year. Then put the rest toward repaying student loan debt.
Paying Off Credit Card Debt vs. Saving Up for an Emergency Fund
Winner: Saving Up for an Emergency Fund
General advice is to save up 3-6 months’ worth of expenses in an emergency fund. While that is certainly a great long-term goal to have, if you have credit card debt that’s burning a hole in your pocket, it can be challenging (and expensive) to wait until this long-term goal becomes a reality. Instead, focus first on setting aside $500-$2,000 into a short-term emergency fund that can help cover relatively small emergencies (like a fender-bender or a broken appliance). Once you have the short-term fund saved up, you can put your resources toward credit card debt while you develop a plan for the larger goal of 3-6 months of expenses.
Funding Your Retirement vs. Saving for Your Child’s Education
Winner: Funding Your Retirement
This was one of the most common questions I received when I was leading pre-retirement seminars. I often heard this question from people in their 50s who had kids in high school. I’m sure, in their mind, their child’s education was a much more pressing need as it was coming up in just a few years. However, it’s important to remember that your child can borrow money to pay for their education, but you can’t borrow money to pay for your retirement. While you’ll likely work on both of these goals side by side, saving for your retirement should always take priority.
Staying at Home with a Child vs. Paying for Daycare
Winner: Draw
There is a lot of debate about how to save money over the short- and long-term while raising your kids. While I’m certainly not an expert in parenting, as I’ve talked to friends and colleagues there doesn’t seem to be a single right answer. If you stay home with a child, you’ll save money on child care costs but you’ll be losing a family income and potentially hurting your future earning potential. If you pay for daycare, you’ll be incurring large costs in the short-term, but keeping dual incomes and earning potentials high. This seems to be more of a personal decision than a financial one.
Buying a Home vs. Renting
Winner: Draw
For so long, conventional wisdom was that in order to be financially well you had to own your home. As your largest financial asset, it was often one of the best ways to build wealth. While you can certainly build wealth by buying a home, you can also be financially well and build wealth while you are renting. The question of whether to buy or rent should depend more on your lifestyle. If you’re planning to stay in one place long-term, you’re ready to invest in a specific neighborhood, and you’re willing to put in the time, effort, and money into maintaining a house, then home buying might be for you. However, if you’d like to have more flexibility with where you live, you haven’t settled on a specific place, and/or you’re glad to let someone else do the maintenance work for you, renting may be a better option. If you do decide to rent and plan to do so over the longer-term, make sure you’re focusing on building wealth via other avenues, such as retirement savings or other types of investing.