I’m 26, making $ 85,000 a year, but I have $ 120,000 in student loans and no savings. Should I stop contributing to my 401 (k) to get out of debt?
I am a 26 year old software engineer with an MBA who earns $ 85,000 per year and my take home pay is approximately $ 3,700 per month. I contribute 8% to my 401 (k) and I am matched once a year by my company for 7%. Currently my 401 (k) contains $ 28,000, most of which is in a target date fund. I put $ 1,500 in my HSA every year. I have no other investments or savings (literally $ 150, that’s it).
My main expenses are as follows: I have $ 105,000 in government student loans on an income-tested repayment plan and $ 15,000 in private student loans. I am currently renting in Cincinnati, where I pay $ 950 per month including charges, with a roommate. I have a car payment of $ 650 per month for another three years, unpaid credit card debt of $ 10,000, and private consolidation loans of $ 20,000 (some due to unforeseen circumstances and most for a living. at University). Just 24 months ago, I had $ 50,000 in credit card debt and have already paid off $ 20,000.
I have been told that I am “rich” and that “you make a lot of money” because of what I earn. But I still rent because I can’t afford a down payment and drive a modest car. I hope to be free from all credit and personal loan debt within 30 years (one can dream of it) but I still won’t own a home and just paid off a car that has driven nearly 100,000 miles at this moment. At the end of the day, I don’t feel rich at all. I live paycheck to paycheck and if I lose my job, I have no way to live beyond 30 days. (I have $ 60,000 in open lines of credit.)
The government estimates that it will take 18 years to pay off my student loan debt and my final payments will be $ 1,200 in 15 years. How can I ever buy a house? Should I stop putting money into my 401 (k)? I would save $ 6,000 a year to pay off my debt. Will I one day be able to retire? I feel like that high salary and “high earning potential” doesn’t mean anything. If I stop contributing when I retire, will I ever be able to retire?
I can’t afford a financial planner because I pay every extra penny for any secured debt I have. There is no debt relief program for a high income 26 year old with my level and type of debt. The sad fact is… I don’t think I can get out of this hole until my 40s are over, when I feel like I’m going to fight the fierce battle for retirement savings. I even thought about quitting my job for another company in order to cash in my 401 (k) to pay off debt with high interest rates, but I was never told that was a bad thing to to do.
I knew I wanted to respond to your letter because you are far from alone: so many people struggle with large student debt like you. EffectivelyTotal student loan debt has now swelled to about $ 1.6 trillion. About two in three seniors who graduated in 2018 had student loan debt; the average was over $ 29,000. And those who pursue higher education often add a lot more to that number.
So I asked experts how you should handle the juggling of your student loans, retirement savings, and other expenses and debts. Here is what they advise.
First of all, don’t despair. “It must make it seem like you’re in a dead end, but you’ve got one of the best things going for you – time,” says Mitchell Hockenbury, a certified financial planner with 1,440 financial partners in Kansas City, Mo. Indeed, at only 26 years old, you have decades to save for your retirement. In addition, you “have a good salary in a city that is cheaper than other parts of the country,” he adds.
Having said that, this amount of debt must, without a doubt, be intimidating. Here is what to do. Keep contributing to your 401 (k) until your employer matches, recommends Fred Egler, a financial planner at Betterment for Business: “Even with debt, it’s a good strategy, because the employer is free money that you would otherwise lose. ”
Do it while you are aggressively paying off high interest debt like this credit card debt (you’ve already done a “terrific job,” Hockenbury says, to reduce that debt, so you can do it!) As fast as you can! . Look for ways to cut spending in your budget so that you can free up extra money to pay off that debt as quickly as possible.
For example, “Selling your new car and buying a car for $ 5,000 may be worth it. That frees up $ 650 per month, ”says Hockenbury. You may also want to consider a 0% balance transfer card for your credit card to save on interest payments (assuming you pay it off before the 0% period ends). And Egler adds that while your healthcare expenses tend to be very low, “it may be a good idea to withhold additional contributions to your HSA in order to pay off your debt more aggressively. This would free up over $ 100 / month that you could spend on your debt. As you aggressively pay off your high-interest debt (and, of course, keep track of all other debt payments), work on building that emergency fund so you don’t have to rely on your debt. credit card for emergencies in the future.
Once you’ve settled that credit card debt or any other high-interest debt, you’re left with your competing goals of saving for retirement, saving for a home, and saving for student loans. Egler says the priority for these should be saving for retirement until the game, cutting back on student loans (depending on a few factors we’ll discuss below), and then saving for a game. down payment on the house.
“The amount to spend on student loans can be a bit more complicated and depends a lot on the type of loan and the interest rate,” Egler adds. “If the interest on student loans is over 5%, like credit cards, he should still be focusing a lot of cash on the loans because he may be able to pay them off faster. This could open up cash flow for other purposes, like a down payment, sooner. “
You complain about not buying a house in your twenties. Don’t, says Hockenbury: “A number of times you refer to a house and I would say it’s not that bad not to have one. I know a lot of people who don’t buy their first home until their late 30s and early 40s. You have time.”
You were also curious to withdraw money from your 401 (k) to pay off debt. Kimberly Foss Certified Financial Planner, the founder of Empyrion Wealth Management in Roseville, California, says not to do it, even as a 401 (k) loan: “If that was her only source of funds to pay off the debt then I would consider it, if not, no I would not touch [the] 401 (k) to pay off the debt.
Hockenbury adds that he doesn’t recommend that you “try to change jobs just to get money out of your 401 (k). I would not withdraw the money. Change jobs to thrive, higher pay or better opportunities.
In short, he adds: “Don’t look for miracle solutions. It’s going to take a while, but you have it.