You will never have more money than when you start your first job. You likely went from working a part-time job or unpaid internship while you were a student to drawing your first salaried paycheck, complete with benefits. With the recent academic year coming to a close, there is a good chance you are, or at least know of, someone who is embarking on their career. Now is the opportunity to establish some good money habits.
There is also a good chance nowadays that you, or the recent graduate, have some significant student loan debt to begin paying off. According to the most recent data, the Class of 2017 graduates have an average student loan debt of $39,400. If you just graduated, you may be in a six-month grace period, but be forewarned: Using a 6.8% interest rate and the standard 10-year repayment plan, you’ll be getting a monthly bill for $453 very soon. Furthermore, student loan debt never goes away, even in bankruptcy.
For many young investors in situations like this, we generally see three types of people: Those who aggressively pay off their student loans and delay saving for retirement, those who save everything and finance their loans for as long as they can, and those who spend everything coming in, by renting the fancy downtown apartment, purchasing a new car, joining the exclusive gym or golf club, etc.
We all know the person who spends every penny isn’t making the wisest decisions. But what about the person who attacks their student loan debt? The mantra most everyone agrees upon is, “Get out of debt; debt is bad.” We believe you should look at what grows your net worth in totality. We recommend hedging your bets and finding a balance between saving and paying down debt. Last year, the market returned 21%. If you focus your money on paying down your student loans at 6.8%, yes, you may be paying less interest over time, but you could be missing a tax deduction for retirement savings, the free money of an employer match, and growth in market.
Without getting too technical with equations, we’re talking about the concept of the time value of money: Money is worth more today than an identical amount in the future because of its potential earning capacity. The sooner you can begin investing money, the better off you should be through the power of compounding. The average rolling 10-year return since 1925 is 10.6%, which is very likely more than the interest rate on your student loans. Further, the longer interest has to compound the more meaningful an early start will be. Compounding interest is interest earned on the initial investment and on the interest earned in each previous holding period. Waiting to save money does not cost you the compounding from $2 to $4, but the compounding from $1 million to $2 million.
If you are in the 25% tax bracket, and you save pre-tax to your 401(k), you’re essentially deferring 25% of that amount in taxes. You also don’t want to leave employer match money on the table. For example, an employer may offer to “match” 50% of your first 6% of contributions to the plan. This means that if you invest 6% of your salary into the retirement plan, your employer will add another 3%. This is the equivalent of being handed free money.
While it might seem counterintuitive, we generally recommend paying yourself first. Do not sacrifice retirement for student debt. Even if you promise to start saving when all of your debts are completely paid off, you run the risk that you’ll never get to that point.
If you have questions about finding the happy medium between paying down your student loan debt and saving for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
