Saving for retirement or paying off student debts: Which Should You prioritise?
One of the biggest problems millennials have to cope with is paying off student debts. This is in addition to other expense avenues like credit card bills, grocery bills, rent and other miscellaneous expenses that come with life as an adult.
You are expected to handle all your expenses, pay off student debt, pay off personal loans and still save for retirement. It is only natural therefore to think of prioritising. So which should you go for?
Retirement most important
If you are able to meet your debt obligations and still have enough left to put away the right amount for retirement, you should never ignore saving for retirement. It is tempting to pay off thousands of student debt that is bogging your mind down right now instead of investing in retirement that is decades away but it might hurt you in the long run. This is especially true when your pension contributions are matched by your employer. You should aim to save 15% of your income towards your retirement.
When should you prioritise student debt?
Although saving for retirement should be the highest priority, it may be a wise idea to knock down your contributions if your current debt situation is near bankruptcy levels. As unlikely as it sounds, it is not uncommon to find young adults facing bankruptcy as a result of student debt. A quick example is an individual earning £15,000 a year but faced with £30,000 in student debt.
In such a situation, it is best to channel your finances towards reversing your fortunes. This approach is treating debt as your biggest obstacle right now. Look at different ways to pay off the debt such as consolidations or getting a personal loan with much lower interest rates. When you have brought down your debt to a reasonable level, you can go back to channelling all your efforts into growing a healthy retirement fund.
At this stage, you can consider putting away double the recommended 15% of your income or more depending on your specific situation.
Why it makes sense
People faced with sizeable debt understand the emotional turmoil it brings. A lot of mental energy is expended thinking of how to meet up with financial obligations. When you are out of debt or at least reduced debt to a comfortable level, you can better plan about your life ahead. More importantly, you will have more free income to invest into a retirement fund. So when you put heavy debt ahead of retirement, you can rest in the knowledge that it is a sacrifice that will help you to better prepare for retirement.
When you’re young, and especially when you’re earning real money for the first time, it can be very tempting to spend your money on things you want at the time. It’s very easy to want to spend all your new disposable income on yourself, but putting away that extra bit of money each month will ensure you’ll have a comfortable retirement.
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