Liz Weston

Dear Liz: How do you prioritize financial goals on a small salary? I am 24 and a college graduate with about $40,000 in student loan debt. Because I work full-time at a nonprofit educational organization, about half of my loans qualify for the Public Service Loan Forgiveness program, so I currently only pay the monthly payment on a private loan and two other small loans. I earn a small salary, but I have always been drawn to jobs in service-oriented, nonprofit fields, and I am perfectly fine with the fact that I’ll never have a career with a six-figure salary. My problem is that after rent, utilities, student loan payments, groceries and other such monthly bills, I have very little money left over to divide among my different financial goals. I make a small monthly contribution to my company-sponsored 403(b) plan, but I’m also trying to rebuild my savings after paying out of pocket for an expensive root canal. I occasionally earn some extra cash from baby-sitting, and I live a fairly simple lifestyle — I own my used car, I walk to work — yet I feel like I’ve barely been making a dent in any of my goals — saving for retirement, rebuilding savings and paying off student loans. How can I leverage what’s left over at the end of the month to reach my goals? Would it be better to focus on one goal rather than all three?

Answer: Many people in your situation focus on a single goal hoping to make faster progress. They don’t fully realize what their single-mindedness is costing them.

Prioritizing debt repayment over saving for retirement is particularly costly. Not only do you give up potential company matches, but the money you don’t contribute can’t earn future tax-deferred returns. At your young age, every $100 you contribute could grow to more than $2,000 by the time you hit retirement age, assuming 8% average annual returns, which is the historical long-term average for the stock market. In fact, the younger you are, the more you give up by not contributing to a retirement fund. Ask any of your older co-workers if it gets any easier to save for retirement. They’ll probably tell you that they wish they’d gotten serious about retirement savings when they were a lot younger.

Building up your emergency savings may seem prudent as well, but you don’t want to do so at the expense of your retirement fund or instead of paying down high rate debt.

So here’s your game plan. Instead of divvying up what you have left after paying bills, start by paying yourself first. Contribute at least 10% of your income to your company retirement plan. Then investigate the possibilities of consolidating your private student loan into a fixed-rate loan, since rates probably will rise in the future. If you can lock in a low rate, it would then make sense to start building up your emergency savings. If you can’t, you might want to divide your money between savings and debt repayment.

It will be tough to swing all this. You may be able to make it easier by finding a roommate or a cheaper place to rent, or looking for more outside gigs such as baby-sitting until your income rises enough to allow you to comfortably pursue all your goals.