Save for retirement or pay off debt? A recent early retiree’s thoughts...

 

Ringing Rocks Park, Hollidaysburg, PA

Recently, I heard from my niece with some awesome news that she managed to pay off $10,000 in student loans!  I congratulated her on her awesome achievement at her young age of 21!  Frankly, at her age, it’s not uncommon to spend, then spend some more, to live the ‘FOMO’ (fear of missing out) lifestyle.

I take partial credit as I always tried to teach her about finance, but this was mostly on her.  She still has to make the decision to follow through on her commitment to do this.  And for that, I am very proud of what she was able to accomplish!

The question to pay off debt vs saving for retirement is a very popular question that most seriously financially minded people would surely have asked at least once in their journey, to achieve financial independence.

In my opinion, the short answer is:  you should pay off debt and save for retirement.  You can’t ignore one or the other, as both are equally important...

This is what I’d like to suggest:

  • If you’re currently working, where the company offers a retirement account like the 401k, then you should put away money towards your retirement.  
If company has a match program, where company pays you free money to save, then take that, for sure.  For example, most companies will match anywhere from 3 to 6% (on average) if you save that percentage yourself.  

This equates to getting free money to save!  If you saved $1,200 (3% of $40,000 as an example), then you would get another $1,200 from your company, if your company matched up to 3%.  If your company matches 5%, then you should strive to save $2,000 (5% of $40,000), so you can get another $2,000 from your company for FREE!

Ultimately, strategy to ramp up your retirement savings calls for amount much higher than that, but for those just starting out in their careers, this is a good start.
  • If your company does not offer a retirement account (or you currently work part time), then open an IRA or a Roth IRA.  (Click here on how to open one.)
Open an IRA or Roth IRA.  Set up an automatic savings each month to this account.  Strive to save at least  $1,000 as a good starting point, but keep raising the savings amount, whenever possible.
  • Concentrate on paying off student loan!
Now that you’ve set up your retirement account and you’re contributing money towards it, you should now do everything you can to pay off your student loan(s).  

Budget to figure out how much money you have coming in vs going out. (For budgeting tips, click here.)

Cut out discretionary spending like these below:

  1. Coffee purchased from stores.  Try to make your own!
  2. Lunches purchased.  Try making your own.  Sandwiches or salads made from home will cost so much less than bought lunches.
  3. FOMO lifestyle.  Think how awesome it would feel when you start seeing real results paying off your student loan!  There will always be a new ‘FOMO’ thing happening, whether it’s the latest gadget, an exotic vacation spot, or a fad clothing.  Don’t be distracted by it. Keep pushing towards your goal!
  4. Try to buy what’s needed and not what’s wanted.  Figure out this difference, and you’ll be well on your way to becoming financially healthy.
  5. Reduce the top 3 expenses each month (housing, transportation, and food).  
Once you get your spending under control, plan, then commit to how much you’ll pay towards your student loan.  This is perhaps the most important part of reducing your debt.  I can talk for a million years the importance of doing this, but ultimately, it’s up to you to actually do this yourself.
  • Don’t forget to write down your goal!
Write down your goal so you can hold yourself accountable each month, then each year.  Without a written goal, you will most likely NOT succeed!

Write down how much you’ll pay down each month, then keep this going.  Always look at this written plan to get motivated and to want to continue this journey.  

Check how you’re doing each month, each quarter, half year, then year.  

In conclusion:
  • The path to financial health and financial independence is a difficult one.  If it was easy, then everyone would be retiring early (debt free) and enjoying their lives.  Sadly, this is not the case.  
  • Like John F. Kennedy said, “...we choose to go to the moon...not because they are easy, but because they are hard...”.  Nothing worthwhile is achieved the easy way.  You have to sacrifice, work hard, and practice to get there.
  • Write down your goal, and hold yourself accountable.  Keep doing it, remind yourself why you’re doing what you’re doing, then push forward.  
  • Celebrate each month, and each year you pay down your debt.  Get motivated to keep it up!
I’d like to once again say how proud I am of our niece.  I wish anyone who are also in her situation to be motivated by her achievement.  It took real discipline and sacrifice to pay that amount off.  Keep up the great work!  We’re rooting for you!

Thank you all for reading!

Jake

Wandering Money Pig 

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