Should you save first or prioritize paying down your own loans?
Determining how much to save for your children’s education and how much to spend paying off your own loans can be a confusing prospect. Should you focus on your current loans, or look toward the future? Many people feel conflicted because they feel like they should put their children first, but know they need to pay off their loans in order to help the financial prospects of their whole family.
The following information can help you determine the right path for your family. Although deciding how much to spend paying down debt and how much to save for the ever increasing costs of college can be an emotional conundrum, there is actually a fairly clear-cut answer. Before focusing on just your children, you need to protect the financial interests of your entire family. This means ensuring that you have sufficient savings and that you pay down debt quickly.
First things first, many financial experts suggest that your main priority should be ensuring that you have sufficient savings for an unforeseen circumstance like a medical emergency, or a job loss.
“With the uncertain economy, experts suggest that you squirrel away at least four to seven months’ worth of living expenses,” states Scott Westcott on Yahoo News Finance.
Once you put aside enough money for an emergency, you have to determine where the rest of your money should be spent. Performing some simple calculations can help you see how far your dollar will go in each scenario: paying down debt or saving for college. Most likely, you will find that paying down debt is your best option as far as getting the most bang for your buck.
“Calculate if the potential earnings on your investments for your child’s education will likely outpace the interest rate you’re paying on your student loan debt,” states Westcott.
Even if you can create an investment portfolio that is well diversified and may perform better than the interest rate on your loans, there are many reasons to pay down your debt before saving for college. It’s important to keep in mind that you’re not being selfish, but rather are helping your entire family by paying down your loans.
“If you’re concerned about saving for your child’s future education, eliminating your own loans should take priority,” according to the Women & Co. blog at the Huffington Post.
When your child approaches college age, the amount of debt you have will likely influence the places he or she applies to. Paying down debt will also help you obtain a loan in the future when you more accurately know how much college will cost.
“If you pay off your loans and build a solid financial base then you will have more options to pay for college down the road. If you don’t build a solid financial base, then it is harder to not only help your kids but yourself,” states personal finance advisor Andrea Travillian, who is the founder of Smart Step, Inc. “No one will give you a loan to retire, but worst case scenario your child can take out a student loan.”
The realities of retirement planning should be a serious consideration. Not only will your options for retirement savings decrease as you get older, the investments you do make will not have time to go as far if you wait.
“But putting off saving for retirement until you’re debt-free could cost you the most valuable asset you have: time,” warns Sandra Block from Kiplinger. “Thanks to the magic of compounding, even small contributions to a 401(k) or similar retirement plan will grow significantly, especially if your company matches contributions.”
The fact that you should focus on your own debt and retirement doesn’t mean that you will be ignoring the needs of your children until your debt is gone. If you make a very serious budget, you can tackle your debt most efficiently and start putting away money for your children faster.
Lyz Lenz from the Mint Life blog describes how she was able to plan for her own education debt and her children’s by enforcing a strict budget. They bought bulk groceries, cut down on clothes shopping and even reused sandwich bags to save, and it all added up.
“Two months ago, we were able to pay off one loan two months early and we’re inching closer to our goal of eliminating my college debt by early next year,” states Lenz. “‘What will we do with all that money, when we don’t have to pay Sallie Mae?’ I recently asked my husband. ‘We’ll save it for more college,’ he replied.”
The bottom line is to talk to your financial institution about a savings account so that you have money saved for any unforeseen circumstances and find out what your best options are for retirement savings. In the meantime, get serious about your budget and you will place yourself in the best position to begin saving for your children’s education.
Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.