How to Pay off Student Loans and Save for Retirement at the Same Time

Plan Your Financial Goals

Should you pay off your burdensome student loans or save for retirement? Well, this is a dilemma many graduates come face-to-face with soon after graduating from college. In fact, the term ‘saving’ isn’t in their vocabulary, especially with no jobs.

According to Student loan hero, last year’s class graduated with an average of $29,800 in student loans. The statistics get uglier with up to 70 percent of graduates from colleges walking around with student loans hanging over their heads.

With such immense pressure to take care of the immediate threat (student loans) and also secure the sunset years, finding a balance is difficult, to say the least. The most obvious route one would take is to clear the student loans.

While this lifts the immediate financial pressure, starting off late in retirement savings can cost you a whole lot more than just the college debt.

Don’t worry though because, in this article, we’ll look at how to plan your financial life.

1.      Plan Your Financial Goals

Among the heavy guzzlers of household budgetsare student loans. With that said, they shouldn’t be the reason to ignore or put on hold other crucial life goals. Instead, the best way to tackle this problem is by creating a financial plan.

Yes, the budget may be tight but with a financial plan in place, you have guidance because you can prioritize various financial obligations. Take the time to write down all your goals. However, writing them down will do you no good if you don’t have an execution plan. Therefore, identify the necessary steps you must take in order to realize these goals. According to a Gallup poll, few investors had a financial plan, only about 40%.

Regardless of your financial situation, however, having a financial plan allows you to break down tasks and achieve them one at a time. If you look at the college debt alone, chances are you’ll lose hope of ever achieving financial freedom. The trick is to look at the loan in the context of a bigger picture. This way, you can fit it into other financial aspects of life.

2.      Craft a Spending Plan

You’ve heard this over and over again. In fact, it’s a cliché to your ears that tracking your expenses is crucial to achieving financial freedom. It’s true, but apart from analyzing your past spending habits, it’s also vital to look into the future. How will you spend your money?

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Having a personal budget is important in tracking your income and expenses. A recent survey revealed that 74 percent of Americans have a budget, but the biggest challenge is following it.

3.      Create an Emergency Fund

No one knows what the future holds, but you don’t have to live in fear of the unknown. Rather, your best weapon is preparation. This is why financial advisors recommend setting aside at least six months’ worth of living expenses. Even with such emphasis on emergency savings, Americans still find it hard to put away one month’s worth. The best route to achieving this goal is by making use of automatic money transfers from your checking account into a savings account.

You can also opt for the Roth IRA and Health Savings Account as a small percentage of the emergency fund. Nevertheless, you want to have at least three months’ worth of liquid assets before investing.

4.      Prioritize Debts

Debts differ in multiple ways: interest rates, due dates, and installment size, etc. Therefore, when paying off online just right loans, it’s important to list your debts starting with those with the highest interest rates. You see, student loans and mortgages have a long repayment period, with low-interest rates as well. This means they are lower in priority compared to credit card debts, which have high-interest rates and short repayment periods.

With this mind, the best way to clear your debts is by eliminating those with high-interest rates and shorter repayment periods first.

5.      Prioritize Retirement Savings

Again, saving is a foreign word to young employees, especially when paying off student loans pop up every month. For many graduates, clearing their student debts is the first task on their list, and while this may relieve the financial pressure, it’ll only be for a while and at the expense of their retirement.

Financial experts recommend putting away 10 to 20 percent of your income toward retirement savings. By doing this, you can achieve financial independence sooner than you think. In addition, there’s the added power of compound interest when you save toward your retirement early.

A report by Morningstar revealed the drag effect of student loans on retirement savings. According to the report, retirement savings are reduced by 35 cents for each dollar owed onstudent loans.

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6.      Fitting Student Loans into Your Budget

Before you can embark on paying off your student debts, it’s important to understand the type of loan in question. Is it a private or federal loan? Remember, the type of loan will determine the options available to you.

For example, you can refinance private loans or consolidate federal loans. Both options are suitable and fit well into your budget. In the long run, these options can lower the overall costs associated with the loans.

When choosing your repayment plan, consider these crucial facts:

  • How much you make will determine your monthly installments.
  • You can adjust your repayment plan depending on your goals and needs.
  • Private loans have fewer repayment options compared to federal loans. For more information, contact your lender for a full list of available options.
  • Federal student loans have multiple options to choose from. If you fail to choose one, you’ll automatically fall under the standard repayment plan, which consists of a 10-year repayment period.
  • Also, if you took out a federal student loan after July 1, 2006, you’ll repay the loan with a fixed interest rate throughout the loan’s life.
  • Automatic debit payments will make your life a bed of roses. Since payments are automatic, you’ll never miss a single payment. Moreover, there’s a 0.25 percent deduction on interest rates after signing up for this plan.

Bottom Line

It’s important to have a financial plan in place in order to take control of your finances. In addition, it has to be flexible and simple to follow through with.

If you feel like your student loans are becoming a burden due to a long time it’s taking to clear, always remember there are ways you can squeeze in these payments in your plan and still save for your retirement.

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