Student loans or retirement: Where should your money go?

By Citizens Staff

Hint: There’s no one-size-fits-all formula or equation

You’ve probably heard this one before:

Start saving and investing for retirement while you’re young!

Then, you’ll get this one:

Pay off your student loans first to save on interest!

Not sure what to believe? The truth is, it’s best — in most cases — to do both at the same time, not one before the other. So how do you balance these two financial goals?

Spoiler alert: There’s no one-size-fits-all formula or equation. It really depends on your unique goals, resources, and circumstances.

Instead, start by prioritizing all your financial goals, not just saving for retirement and paying off student loans sooner. What’s at the top of your list? Covering the final costs of your wedding that’s in a few months? Buying a house in the next five years? Taking a two-week trip to Europe next summer? List out your “must-haves,” because they’ll impact where your money goes.

Let’s say your top goal is buying your first home, ideally within the next five years. You figure that you’ll need $20,000 saved to make that happen. You can easily calculate a yearly savings target of $4,000, or about $333 per month. Since this is your top goal, this money needs to be factored into your budget first. Continue to do this for your other must-haves.

Ask yourself what your must-have financial goals are. Then, you can decide how to prioritize paying off student loans quickly and saving for retirement.

Now that your top goals are accounted for — and your existing student loan payment is accounted for — see what funds are left over for other goals, like paying down student loans sooner and saving for retirement.

It’s a balancing act. Sure, you could go all-in on one goal, like paying off your student loans as soon as possible. But if doing so keeps you from buying that dream home you want or postponing your wedding a few years, was that sacrifice worthwhile? Are you better off even with all that money you saved on interest?

Still, there are some caveats to this line of thinking. Those people telling you to save for retirement while you’re young? They’re right. Even if retirement is low on your list of priorities, allocating some money — however trivial — will at least start the clock on compound interest, which is a pillar of successful retirement planning. Plus, your contributions could double if your company matches contributions up to a certain amount. As you achieve those other goals, you can ramp up your retirement contributions to catch up.

And those folks advocating that you pay off student loan debt ASAP? They’re not wrong, either. You’ll pay more in interest if you take the standard 10 years to repay your loan(s) than if you pay it off in five years. Furthermore, extending your repayment length to, say, 25 years will lower your monthly payment(s), but you’ll also pay more interest than the standard 10-year repayment. That extra interest could limit you financially for years.

Everyone has different goals with different savings targets and differing timelines for when they want to achieve them. That’s why the answers to these questions are so dynamic.

So don’t look for a standard formula on how to tackle paying down student loans and saving for retirement. Most financial professionals will tell you it comes down to your unique goals, motivations, and financial resources. Figure out what’s most important to your happiness, put those first, and then focus on those deprioritized, albeit important, goals.

Need help prioritizing your financial goals? Learn how personalized advice from Citizens Wealth Management can deliver tailored answers to your most pressing financial questions.