We regularly talk about retirement planning and how to save effectively for this major life goal. However, we often meet with and advise younger clients, namely millennials, on how to navigate the numerous financial obstacles they face as they leave school, and retirement isn’t always top of mind. They feel overwhelmed by all of the financial decisions they need to address.
One of the largest financial headwinds we see is paying off large amounts of student loan debt. They often feel compelled to focus on their immediate needs and paying down that debt, while putting off other financial savings, such as for retirement or an emergency. Coming up with a strategy to manage the debt versus paying it off, that includes prioritizing all other future goals, is the real answer.
Here are some general strategies for prioritizing savings and debt repayment during the wealth accumulation years:
1. Maximize your 401(k) match. There have been many articles coming out lately about how millennials are not saving for retirement because they are prioritizing paying off debt (or their debt payments alone do not allow them to save at all). The lost years of retirement savings really add up due to the compounding effect. If your employer offers a 401(k) match, we recommend trying to at least save the maximum amount that your employer will match. Even if the employer does not offer a match, try to invest something in your employer retirement plan to start that compounding clock sooner rather than later.
2. Build up a rainy day fund. We know that it may be asking a lot to have 3-6 months’ worth of expenses in savings, especially for younger individuals just starting out in their careers. Even if you don’t have 3 months’ savings, it is prudent to have a small cushion that can pay for unexpected car repairs or medical expenses. To read more about emergency savings, see our past blog “Is Your Piggy Bank Ready for Rainy Days?”.
3. Save for a house down payment. If you are interested in purchasing a home, you will need a down payment. It is ideal to have 20% of the purchase price saved to eliminate the Private Mortgage Insurance (PMI). Even if you are going to use a New Home Buyer program that will cover more of the down payment, typically you are required to cover much of the closing costs.
4. Debt Repayment. If the interest rate and payment schedule is reasonable, pay down the debt according to the schedule and pay extra when extra cash flow allows. Budgeting to use a bonus to pay extra against the debt is one strategy we have seen work well. Prioritize paying down higher interest rate loans first of course.
We also often see couples with young children that would like to start saving for their kids’ future education costs. While it is not always possible to start saving right away due to the other savings and debt repayment priorities mentioned above (and don’t forget daycare!), we often advise young parents to save PFDs for their kids in 529 accounts when possible, with the plan on saving more as income increases and daycare costs decrease.
Of course, for a personalized plan on how to navigate the financial decisions you face, we remain available to coach and advise. Getting started on the right track while you are young makes a huge difference in making sure that you have a financially secure future.
Kim Butler, CFP®
Associate Financial Planner