Q&A: Is it smarter to save for retirement or pay off debt first?

Dear Liz: I graduated from college in May and began a full-time job in October making $36,000. I also do freelance work and receive anywhere from $500 to $1,000 a month from that. I live at home, so I don’t have to pay for rent or groceries, which really helps. Currently, I have just over $18,800 in student loans at an average interest rate of 4.45%. I have also opened a Roth IRA.

My plan currently is to contribute $500 a month to my IRA in order to max it out, and pay $700 a month to my student loans in order to get them out of the way quickly. Or is it better to skip the Roth and put that extra $500 toward my student loans? That way, I would be debt free when I move out of my parents’ house next year. The stock market has done nothing but fall since I opened my account, and I am reading that it could do the same this year as well. But I have also read that it’s good to just keep consistently contributing to an IRA when your debt isn’t high-interest to reap the rewards of compounded returns.

Answer: It’s generally a good idea to start the habit of saving for retirement early and not stop. What the market is doing now doesn’t really matter. It’s what the market does over the next four or five decades that you should care about, and history shows that stocks outperform every other investment class over time.

The $6,000 you contribute this year could grow to about $100,000 by the time you’re in your 60s, if you manage an average annual return of around 7%. (The stock market’s long-term average is closer to 8%.) And Roth IRAs are a pretty great way to invest, because withdrawals are tax-free in retirement.

That said, your other option isn’t a bad idea either. You are not proposing to put off retirement savings for years while you pay off relatively low-rate debt, which clearly would be a bad idea. Instead, what you’re losing is the opportunity to fund a Roth for one year. That’s an opportunity you can’t get back — but you could fully fund the Roth next year, and perhaps use some of your freelance money to fund a SEP IRA or solo 401(k) as well.

Either way, you should be fine.

Tuesday’s need-to-know money news

Today’s top story: NerdWallet’s best credit card tips for January 2019. Also in the news: What the government shutdown means for home loans, 5 reasons credit cards rule for family vacations, and why you should ask your student loan servicer to ungroup your loans.

NerdWallet’s Best Credit Card Tips for January 2019
New year, new cards.

What the Government Shutdown Means for Home Loans
Could the shutdown affect your loan?

5 Reasons Credit Cards Rule for Family Vacations
All about the perks.

Ask Your Student Loan Servicer to Ungroup Your Loans
Use the snowball method.

Monday’s need-to-know money news

Today’s top story: Quick ways to save more money in 2019. Also in the news: Medical bills plague millennials, 3 simple strategies to max out your 401(k), and the basics of Parent PLUS loan forgiveness.

Quick Ways to Save More Money in 2019
Focusing on the simple.

Medical Bills Plague Millennials; These Tips May Be the Cure
Making medical debt more managable.

3 Simple Strategies to Max Out Your 401(k)
Increasing your retirement savings at any income level.

The Basics of Parent PLUS Loan Forgiveness
Who’s responsible for repayment?

Tuesday’s need-to-know money news

Today’s top story: Avoid costly mistakes with the car buyer’s checklist. Also in the news: How to be the holiday host with the most credit card rewards, what you should know before making your first student loan payment, and illegal tax moves to avoid.

Avoid Costly Mistakes With the Car Buyer’s Checklist
Take this list with you to the dealership.

Be the Holiday Host With the Most Credit Card Rewards
Reward yourself for being an excellent host.

Read This Before Making Your First Student Loan Payment
The first day of the rest of your payment life.

Illegal Tax Moves to Avoid
Tiny fibs can lead to big trouble.

Wednesday’s need-to-know money news

Today’s top story: Do your kids a favor and pick retirement savings over tuition. Also in the news: 18 of the best Black Friday deals, Navient’s student loan practices are under fire, and how much it costs to have a float in the Macy’s Thanksgiving Day parade.

Do Your Kids a Favor: Pick Retirement Savings Over Tuition
Looking at the bigger picture.

18 of the Best Black Friday 2018 Deals
Serious savings.

Navient’s student loan practices raise questions in federal audit
Deceptive tactics.

How much does a float in Macy’s Thanksgiving Day Parade cost?
The helium costs will surprise you.

Tuesday’s need-to-know money news

Today’s top story: How an engineer digs out of $100,000 in loans. Also in the news: What to do if Hurricane Florence hits your home and/or mortgage, 3 low-stress ways to invest for retirement, and the pros and cons of identity monitoring.

Debt Diary: How an Engineer Digs Out of $100,000 in Loans
Accounting for every single expense.

What to Do If Hurricane Florence Hits Your Home, Mortgage
Recovering from disaster.

3 Low-Stress Ways to Invest for Retirement
How to get started.

The Pros and Cons of Identity Monitoring Services
Are they worth the expense?

Tuesday’s need-to-know money news

Today’s top story: Text a retailer and you could get back money and time. Also in the news: Shoppers cash in on the Golden Age of branded credit cards, how to spend money guilt-free even if you owe student loans, and the do’s and don’ts of using store credit cards for holiday shopping.

Text a Retailer and You Could Get Back Money and Time
No more waiting on hold.

In ‘Golden Age’ of Branded Credit Cards, Shoppers Cash In
Rewards and incentives are everywhere.

Spend Money Guilt-Free — Even With Student Loans
Don’t ignore your own needs.

Do’s and Don’ts of Using Store Credit Cards for Holiday Shopping
The holiday shopping season is right around the corner.

Friday’s need-to-know money news

Today’s top story: 5 people who are crushing student debt. Also in the news: Skipping student loan forbearance, what it takes for early retirement, and 5 things to avoid buying during Labor Day sales.

Meet 5 People Who Are Crushing Student Debt
How you can follow their lead.

Skip Student Loan Forbearance — Do This Instead
Forbearance should be a last resort.

Dreaming of an Early Retirement? Here’s What It Takes
Better start saving.

5 things to avoid buying during Labor Day sales this year
Skip these “sales.”

Why your kid should help pay for college

I recently heard from the parents of yet another high school senior who turned down a huge scholarship from a good college to attend her “dream school,” which of course has lousy financial aid. Now her parents are scrambling, trying to figure out how to pay for it .

This madness must end.

Asking teenagers to pay the whole cost of a four-year college degree probably isn’t realistic or smart. Kids may be cut off from financial aid, since need-based help is largely based on the parents’ resources. The debt they accumulate may be crippling, and students who try to pay for school entirely on their own are more likely to drop out.

But the open bar approach isn’t wise, either. Setting limits and requiring a kid to pay at least part of the cost can actually lead to better grades while protecting parents’ finances.

In my latest for the Associated Press, why parents should set clear boundaries about how much they’ll pay for college.

Wednesday’s need-to-know money news

Today’s top story: What to buy and skip in September. Also in the news: 5 times to stash your cash and pay with plastic, what college freshman need to know about their student loans, and how to choose the best approach to managing your investments.

What to Buy (and Skip) in September

5 Times to Stash Your Cash and Pay With Plastic
Protecting your purchases.

What College Freshmen Need to Know About Their Student Loans
A whole new world of financial obligation.

How to choose the best approach to managing your investments


It’s all about streamlining.