Student Loans or 401K? A Numerical Breakdown
- Feb 10, 2021
- 3 min read
Written by: Jenny Gattinger, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
“Should I pay off my student loans or fund my 401K?”
This is one of the most common financial questions asked among college graduates once they start working.
Looking at it from an emotional standpoint, some financial experts recommend working towards getting out of debt. They would prioritize paying off your student loans. The idea behind this is that getting rid of the debt burden allows you to then better focus on other financial goals you may have, such as saving towards big purchases and investing.
Now, let’s look at a numerical breakdown.
First and foremost, you have your monthly student loan payment to make. Now assuming you have your monthly budget under control and extra money on hand, this is where things can get interesting.
If your student loans have a lower interest rate (<6% or so), you may want to consider contributing to your 401K. In this case, using a 6-7% conservative return of investment, your money would be growing at a higher rate than that of your student loan interest. In other words, your investment would be earning a greater amount than what you would be saving on your loan interest rates.
That being said, if the interest rates of your student loans are on the higher side, paying off extra debt may outweigh the investment gains.
Your specific company 401K plan should also be considered, especially if there’s a company match. By choosing to invest in your 401K, you would be taking advantage of this so-called “free money” from your employer (note: this is not actually “free money,” but part of your salary package)
According to Fidelity, the average employer 401K contribution reached 4.7% in 2019.
So, let’s say you make $70,000, and you put 4.7% of your salary ($3,290) into your 401K, with an employer match of another 4.7% ($3,290). Using your extra money to contribute $3,290/yr to your 401K, you are actually contributing a total of $6,580. Conversely, if you choose to put your extra money towards debt repayment, you are essentially leaving the extra $3,290/yr on the table. Multiply that by 10 years, and you’re looking at $32,900, which is a pretty big chunk of change!
If you want to take it even further and look at how an extra $3,290/yr would grow at a conservative rate of 7% over the next 25 years, you’re looking at over $200,000. Now THAT’s a huge chunk of change to be leaving on the table!
If your student loan rates are low and you can contribute to your retirement investments, the quicker you can receive your company match, and the more time you’ll have to take advantage of compound interest.
These things said, plug in your specific numbers to see what makes the most sense given your personal situation.
Interested in learning more about how to make your money work for you? Schedule your free 15-minute chat to get started.
Jenny Gattinger, Executive Contributor Brainz Magazine
Jenny is a personal financial coach with a passion for helping millennials reach their financial goals. Having completed a degree in Economics, along with Dave Ramsey’s Financial Coach Master Training, she teaches them how to organize their money and put it to work so that one day, sooner rather than later, they won’t have to. A millennial herself, Jenny’s financial savviness has allowed her to follow her dreams of travel and visit 50+ countries as well as compete internationally in two different sports, all while maintaining a sense of financial wellbeing.
