Provided by Joseph V. Curatolo
For young adults with college debt, deciding whether to pay off student loans early or contribute to a 401(k) can be tough. It’s a financial tug-of-war between digging out from debt today and saving for the future, both of which are very important goals.
Unfortunately, this dilemma affects many people in the workplace today. According to a student debt report by The Institute for College Access and Success, nearly 70 percent of college grads in the Class of 2014 had student debt, and their average debt was nearly $29,000. This equates to a monthly payment of $294, assuming a 4 percent interest rate and a standard 10-year repayment term.
Let’s assume you have a $300 monthly student loan payment. You have to pay it each month — that’s non-negotiable. But should you pay more toward your loans each month to pay them off faster? Or should you contribute any extra funds to your 401(k)? The answer boils down to how your money can best be put to work for you.
The first question you should ask is whether your employer offers a 401(k) match. If yes, you shouldn’t leave this free money on the table. For example, let’s assume your employer matches $1 for every dollar you save in your 401(k), up to 6 percent of your pay. If you make $50,000 a year, 6 percent of your pay is $3,000. So at a minimum, you should consider contributing $3,000 per year to your 401(k) — or $250 per month — to get the full $3,000 match. That’s potentially a 100 percent return on your investment.
Even if your employer doesn’t offer a 401(k) match, it can still be a good idea to contribute to your 401(k). When you make extra payments on a specific debt, you are essentially earning a return equal to the interest rate on that debt. If the interest rate on your student loans is relatively low, the potential long-term returns earned on your 401(k) may outweigh the benefits of shaving a year or two off your student loans. In addition, young adults have time on their side when saving for retirement, so the long-term growth potential of even small investment amounts can make contributing to your 401(k) a smart financial move.
All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.
Joseph V. Curatolo is president of Georgetown Capital Group, 5350 Main St., Williamsville (phone: 633-9800, toll-free 1 (800) 648-8091, fax 633-9789, www.georgetowncapital.com).
Insurance services offered by Georgetown Capital Group, which is independent of Royal Alliance Associates, Inc., with separate ownership, and is not registered as a broker-dealer or investment advisor.
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