This Calculator Will Tell You Whether You Need to Pay a Debt or Save for Retirement
This is a frequently asked question about personal finance: should I pay off student loans or save for retirement ? You can do both , but this calculator from Morningstar will shed some light on your solution.
Debt is almost always a priority, but there are some criteria for prioritizing your savings. For example, if you have a 401 (k) match at work, you probably want to take advantage of it because it is a pretty big ROI on your investment . Also, I like Ramit Sethi’s approach to this issue . He says there is a mathematical and emotional answer:
The mathematical answer is to put your money where it will have the greatest impact. If the interest rate on your debt is lower than the interest rate you can expect from investing, pay the minimum on the debt each month and invest the rate.
The emotional answer is that many people hate to have any kind of debt, so even if they pay off the debt at low interest rates, it still makes sense to them.
A hybrid approach is to split the difference: pay off some of the debt and invest some. Nice compromise.
The Morningstar Calculator takes a mathematical approach. It breaks down the numbers for you based on your interest rate, age, annual income, etc. However, personal finances have a lot to do with your emotions, and the calculator cannot account for a strong urge to get out of debt. For some, this takes precedence. Either way, this is something to consider when making a decision, but it is still useful to look at the numbers. See for yourself using the link below.
Student Loan Calculator | morning Star