Question: I just graduated and now have a good job make more money. Should I pay my student loans or invest in my 401K?
Simple Answer: This question has three basic answers that can apply to this situation:
- You can pay 100% to your student loans until their paid off then begin investing
- Pay your minimum monthly payment on student loans and invest the rest
- Somewhere in between
Long Answer: The decision may be influenced by two large factors.
- Interest rates
- Personal choice
Interest rates. The rational decision would tell you that if your student loans have a lower interest rate than your projected return from your investments that you should take option 2. from above and pay the minimum on your student loans and invest the rest. However, this approach has one large unknown and that’s the future rate of return. If your student loans are over 3% or have a variable interest rate you are mostly likely better with option 1 to first pay off all your student loan debt and then invest.
Personal choice. Personal choice is what happens when rational people make irrational decisions. Paying down a large debt takes a lot of willpower and determination. In your case it may be better to take option 3 to help appease both sides of your brain (rational and irrational).
Hybrid approach. My personal suggestion would be to first consider your complete situation and pay down any other debt that may have variable or high interest rates. For example credit cards, home equity loans, 2nd mortgages, unsecured lines of credit, etc. Then take a hybrid approach and attack your student loans with as much as you’re comfortable paying well more than the minimum payment. Start small and try to invest at least $50 a month in a 401K or Roth IRA.
NOTE: All everyone situations are complex and it is advised that you carefully examine your situation. For more advice and information please visit the forums here http://www.reddit.com/r/personalfinance/ and http://www.getrichslowly.org/forum/ to help you gather the information you need to make good decisiosn for your situation.