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 40 million Americans responsible for 1.2 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 if you find yourself considering 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 payment 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.
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 re-financing is right for you. Talk to a trusted financial advisor about your debt consolidation and re-financing options.
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 4o1k plan.
401ks don’t usually provide the most lucrative portfolios, but 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 is to focus more on high-yielding stocks or hedge funds when you’re further away from retirement. As you get older, transfer riskier investments into more secure sources of income, such as C.D.s or bonds.
To put it in a nutshell, don’t let debt keep you from investing. No matter what you’re debt level, there are steps to reduce your payments and make it more manageable so you can afford to invest, even if it’s small 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?
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