The average monthly student loan payment is $337. But whether the monthly payment you’re on the hook for is larger, smaller, or virtually the same, those payments no doubt monopolize a significant chunk of your money. And because of that, it may be difficult to free up cash for other goals, whether it’s buying a house or upgrading your car.
In fact, you may be inclined to wait until you’ve paid off your student loans to start investing your money. But if you hold off on investing for too long, you might end up short on funds by the time retirement rolls around.
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It’s important to put your money to work
It’s hard to free up large chunks of money to invest when you’re paying off student debt. But you should know that the more time you give your money to grow, the more wealth you stand to accumulate in your investment portfolio.
Meanwhile, many people graduate from college in their early 20s and take 10 years or longer to pay off their student loans. But beginning to invest in your 30s versus your 20s could make a big difference.
Let’s say your goal is to build up a nice retirement nest egg, so you start funding an IRA or 401(k) plan to the tune of $150 a month at age 35 once your student debt is paid off. Let’s also imagine you retire at age 65 and that your portfolio generates an average annual 8% return, which is a bit below the stock market’s average.
In that scenario, you’ll end up with a nest egg worth $204,000. And that’s certainly respectable in its own right.
But now, imagine you start saving and investing that $150 a month at age 25 despite still having student loans to pay off at the time. If you retire at age 65 and your portfolio delivers that same average annual 8% return, you’ll end up with a nest egg worth $466,000. That’s more than double what you’d be looking at by starting to invest at age 35.
And that’s why it’s so important to try to begin investing even when you still have student loan payments hanging over your head. You don’t have to part with a ton of money each month in your 20s and 30s if you’re still paying off educational debt at that point. But do try to invest some amount of money so you can begin to take advantage of the power of compounded returns in your portfolio.
Budgeting could help
When you’re dealing with student loan payments, it’s very important to stick to a tight budget so that you’re able to make the most of your paychecks. If you set up a budget that prioritizes IRA or 401(k) contributions, you might end up in a really strong place once your career wraps up. Better yet, put those retirement plan contributions on autopilot so you’re not tempted to give up on investing while you’re grappling with student loan debt.
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