Should I Invest or Pay Off Student Debt
While recommendations on how much you should save vary, most agree that you should begin to save for retirement as early as possible. But you’re young, free, and might feel like you need to use most of the money you’re earning on rent and other bills. Maybe your starting salary is enough to cover your bills but not much else. Perhaps you want to pay off student debt, buy a house, or start a family – more tangible, present concerns than your retirement in the distant future.
So, should you invest or pay off debt?
The Benefits of Investing and Saving Early
Retirement might seem a long way off, but when it comes to saving for your golden years, it’s much closer than you think. Starting your retirement fund ASAP can provide benefits now and in the future. Check it out:
Maximizing Employer Matches
Many employers who offer a 401(k) program also match a percentage of your contributions, providing an instant return on your money. Each employer has its own contribution matching policies, and there are limits on how much you can contribute to your 401(k) each year ($19,500 in 2020).
You control how much you invest from your paycheck. In many cases, the more you contribute from your pocket, the more your employer matches until you reach their contribution limit.
Potential Tax Breaks
Taxes. Regardless of how you feel about them, you still have to pay them. One of the instantly tangible benefits of your 401(k) contributions is that they’re pre-tax and can reduce your current tax burden.
Jumping ahead a little here, but you may also get tax breaks on the interest you pay on some student loans or a mortgage. Paying off these debts may reduce your deductions and increase your taxable income. As with any issue related to taxes, make sure you consult a tax professional about your specific situation.
The Benefits of Compounding
Saving money is kind of like a cartoon of people rolling downhill through the snow: they start at the top and by the bottom they’re big white boulders. When you save, you can benefit from compounding – the process of accumulating interest on your principal and previously paid interest.
What does this mean? When you start to save early, you not only have more time to sock away savings, but your money has more time to accumulate interest. Interest rates might be low right now, but over time compounding interest can help enhance your savings.
Delaying Only Means You Need to Save More Later
The longer you delay saving for retirement, the higher your payments must be to get the same end-goal number. For example, if you wait until your 40s to start building a retirement fund, you typically need to save about 30% of your income to match what you could have saved if you had started saving 10% in your 20s.
In other words, the dollar amount you need from each paycheck for retirement is actually less if you start in your 20s instead of your 40s.
Keep in mind that while your earning potential increases as you advance in your career, your expenses might keep up with your earnings. Having a family, upgrading your home and car, and other day-to-day and unexpected expenses can still make you feel like you can’t afford to save.
The real question is – can you afford not to?
The Allure of Paying Off Debt
According to research from the Federal Reserve, 54% of young adults who went to college have some debt, including student loans. The same research indicates that in 2020, the average monthly payment for student loans not in deferment ranges from $200-299 per month.
We live in an uncertain world right now, and starting life with a significant monthly expense like student loan payments might feel intimidating.
We don’t advocate avoiding your debts. We also understand how it can be psychologically hard to save and invest when you owe money. Avoiding, paying down, and eliminating “toxic debt” like high-interest credit card debt is a good idea. However, as mentioned, debt like student loans and mortgages often offer tax breaks.
Your Future Is Closer Than You Think
Investing is not without risk. However, saving for retirement is less about returns and more about saving money. Remember, you can’t time the market.
Without planning and saving for retirement, you risk not having enough money to live on later in life or postponing retirement. Learn more about saving for retirement now, your future self will thank you.
You can also save through investing with a Self-Directed Trading or Managed Portfolio account.
Investment advisory services provided by Axos Invest, Inc., an SEC registered investment advisor. All rights reserved. For information about our advisory services, please view our ADV Part 2A Brochure, free of charge, at https://www.adviserinfo.sec.gov/Firm/150953. Brokerage services are provided by Axos Invest LLC, a member of the Financial Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). All investments involve risks, including the loss of principal invested. Past performance of a security does not guarantee future results or success. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Axos Invest and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
This blog post was published by Axos Bank on September 15, 2021, and last updated on December 21, 2022.