Many young professionals deal every day with two seemingly conflicting financial issues: paying down student loan debt while also getting started on building their retirement savings. While it’s a challenging situation, committing to a few proven strategies can help young professionals meet their student debt obligations while also setting aside money for the future.
Below, 12 members of Forbes Finance Council offer practical tips that young professionals can leverage to manage their student debt while also saving for retirement. These efforts may feel “small and slow” in the beginning, but sticking with established debt-reduction and savings strategies can yield results that show compounding benefits as time goes on.
Members of Forbes Finance Council share practical strategies for saving for retirement while paying down student debt.
Photos courtesy of the individual members.
1. Commit 15% To Retirement Savings
I usually recommend automatically committing 15% of earnings to your retirement savings. The use of remaining funds should include efforts toward eliminating debt while creating a small savings cushion for an emergency. Pay off your debts as quickly as possible so that you can focus on saving and living within your means. Remember, cash is king! – Geanette Rodriguez-Ojeda, Prestige Finance LLC
2. Automate Debt Payments And Retirement Contributions
Remember the adage, “Out of sight, out of mind”! Automating debt payments and retirement contributions allows you to focus on what to do with your remaining budget rather than stress over how to divide up every paycheck. Let your money work for you in the background, slowly chipping away at your debt and building for your retirement. You can always increase or decrease your automated payments or contributions as needed. – Zack Cook, Keyfactor
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3. Max Out Your 401(k)
Max out your 401(k) to grab any company match and put aside long-term money. After this, analyze your loan against other cash flow needs. Assuming you have excess cash flow after all monthly needs, then look at what’s the most expensive debt (after tax deductions) and focus on reducing that. Consider using any bonus income to reduce debt, and live on your normal pay. – Chris Tierney, Moore Colson CPAs and Advisors
4. Don’t Skip Payments Or Put Off Savings
When you start to say, “I’ll do it next month,” beware: Your finances might be on a slippery slope. It’s easy to skip payments on a student loan and even easier to put off saving for retirement. You need to take choice out of the equation. Automate your payments, including what goes into savings. This will help you manage your money and, most importantly, save for the future. – Robert Cole, Private College 529 Plan
5. Take Advantage Of All Employee Benefits
First, take advantage of any benefits offered by your employer. If they are providing matching contributions to 401(k)s, you need to contribute up to the match so that you maximize your earning potential. Then, even when there is a deferment option, make your payments on student loan debt—compounded interest is a killer of any plan. Pay down debt as quickly as possible, freeing up future cash flow. – Cynthia Hemingway, Fourlane, Inc.
6. View Student Debt As A ‘Mortgage’
A young professional should see student debt as a “mortgage” they have taken out on their career. They should repay that “mortgage” over time and refinance the investment they made in their human capital, just as they would in any physical capital they acquired. – Dr. Philip Fischer, Micro Macro Infinity
7. Ensure Student Debt Takes Precedence
Paying down student debt should take precedence over any other form of spending. The faster you can pay off your student debt, the better off you will be in the long run. Prioritize debt payments in your monthly budget along with other fixed costs. Unless you have a loan with a very low interest rate, paying debt down should take precedence over anything else. – Sonya Thadhani Mughal, Bailard, Inc.
8. Pay Yourself First
There are two concepts to employ here. First, pay yourself first. Having a set amount or a percentage of your income dedicated to savings ensures that you continue working toward your financial goals even while paying down debt. Then, I’d use the debt snowball to quickly pay off your debt. Begin with the smallest, making minimum payments on everything else, and pay off each debt quickly. – Justin Goodbread, WealthSource Partners, LLC
9. Leverage The Benefits Of Compounding Interest
It’s essential to understand the benefits of compounding interest. Focus on maximizing your employer match for 401(k) plans and making minimal contributions to a qualifying traditional or Roth IRA. Even a small investment into retirement savings pays dividends with compounding interest over 25 years. Decide if loan consolidation lowers your overall interest rate when paying off student debt. – Jared Weitz, United Capital Source Inc.
10. Determine Whether You Even Need A College Degree
Before taking out college debt in the first place, ask yourself, “Do I really need a college degree to start working in my chosen field?” College debt is expensive, and many college degrees do not equate to a higher salary in the workforce. If you are trying to save for retirement while paying off debt, ask yourself, “Is my savings interest rate higher than my debt rate?” If not, pay off debt before saving. – Joseph Orseno, Tiltify
11. Validate The Debt
First validate the debt to see if it can be reduced, forgiven or settled for less. Second, pay it off first before investing elsewhere. Paying off debt is its own form of investing. It requires capital, it provides a yield by freeing up the payment, and it has a rate of return via saved interest. Paying off debt is also a “guaranteed” investment; the same cannot be said of anything else. – Jerry Fetta, Wealth DynamX
12. Start Saving Right Away
I think the most important action item is to get started saving. Many young professionals delay starting 401(k) contributions and working toward other savings goals with the idea that they will catch up when they have a better handle on things. The reality is that we don’t get time back. Just a few years of not making those contributions can make a significant difference! – Trevor Wilde, Wilde Wealth Management Group