Pay off debt or save for the future? How to do both
So, you’ve landed a good job - - and are finally making a decent salary. It’s time to start saving for the future.
Your first house, a new car, even time to save for retirement.
But you’ve also got to pay off your student loan debt and maybe some credit card debt. How can you save for the future when you’re still paying off the past?
Here are some things to think about.
First, remember most student loans and mortgages – if you have one – usually charge lower interest rates and can be tax deductible. So it may make sense to initially pay these loans over time as scheduled, instead of paying extra to pay them off early.
When looking to pay off debt, concentrate first on non-tax deductible debt - - like credit cards. This is the debt you want to pay off as fast as you can. If you have multiple credit cards, pick the ones with the highest interest rate to tackle first.
And make paying things off as easy as you can. Sign up for automatic payments on your credit cards and other bills. That way, you won’t accidentally fall behind and get hit with extra interest or late payments.
One of the best ways to invest for the future is to contribute to your 401(k) or other retirement plan through work - - at least up to the employer match if offered. Don’t leave money on the table. That’s because time itself can be a valuable asset.
Take this example. See the difference in what you would have saved by age 65 depending on when you began investing. Saving the exact same amount each month, you could be looking at over $300,000 more if you had started five years earlier.
Want more help on how to start saving for the future? Talk to your local Edward Jones financial advisor. They can help you explore all your options and work with you to put a strategy in place.
Which is more important: paying off debt or saving for the future? When you’ve started earning a steady income but you’re still paying off hefty student loans, it can be hard to figure out which should come first.
Paying off your debt as fast as you can may seem like the responsible thing to do. But sacrificing saving for your future could leave your finances at a permanent disadvantage down the road.
The good news is you don’t have to choose one over the other – you can do both! It just takes some planning.
Four ways to make headway with your finances
- Contribute enough to your 401(k) or other retirement plan through work to earn any employer match. In this way, you won’t be leaving money on the table.
- Pay off any nondeductible debt (such as credit cards) as fast as you can.
- Pay your deductible debt (such as student loans or a mortgage) as scheduled, based on the length of the loan.
- Set some money aside ($500 to one month's worth of expenses to start) for emergencies.
Why not put all your “extra” money toward paying off your debt before you start investing?
Though it’s a personal decision, starting early with investing could benefit you in the long run. As this example shows, you could end up with nearly $200,000 more if you start investing the same amount each month at age 30 instead of 33.
Source: Edward Jones
This bar graph illustrates an investment of the same amount each month at different age levels. The example assumes investing $6,000 a year, plus an additional $1,000 catch-up contribution at age 50 and older, with a hypothetical 7% average annual return. Starting investing at age 30 vs. 33 gives you $193,000 more. Starting at age 35 vs. 38 gives you $137,000 more. Starting at age 40 vs. 43 gives you $98,000 more. By starting at age 30 instead of age 43, you would earn $613,000 more in this example.
Need help prioritizing? Your financial advisor can help you set up a strategy that fits your life today and works toward your goals for tomorrow.”