Invest or Pay Off Debt? 401(k) vs Student Loans

Are you staring down the barrel of hefty student loans while also eyeing the potentially lucrative horizon of 401(k) investments? If you’ve just landed a new job, congratulations! But, with that comes a new financial dilemma. The good news is, you’re not alone in this predicament. Many young professionals grapple with the decision to prioritize either investing in a 401(k) or paying down student loans.

Understanding 401(k) Plans and Vesting

First, let’s break down what a 401(k) plan is and what it means to be “vested”. A 401(k) is an employer-sponsored retirement account that allows employees to save and invest a portion of their paycheck before taxes are taken out. “Vesting” refers to the amount of time you need to work for your company before gaining full ownership of the employer match contributions to your 401(k).

In your case, you’ve been told that your company matches 401(k) contributions but you won’t be eligible for this match until you’ve been there for a year. And, at that point, you’ll only be 25% vested. This means that if you leave the company after a year, you’d only be able to take 25% of your employer’s contributions with you.

Prioritize or Balance?

So, should you wait until the free money (employer match) kicks in after a year or should you focus on those high-interest student loans in the meantime?

The answer isn’t one-size-fits-all, and it depends on your financial circumstances and comfort level with debt. Here are some points to consider:

  1. Interest Rates Matter: Compare the interest rate on your student loans to the potential return on your 401(k) investments. If your loans have a significantly higher interest rate, it may make sense to prioritize paying those down first.
  2. The Power of Compounding: Even without the employer match, contributing to your 401(k) can provide long-term benefits due to compounding interest. The earlier you start investing, the more time your money has to grow.
  3. Tax Benefits: Contributions to your 401(k) are made pre-tax, reducing your taxable income for the year. This could potentially bump you into a lower tax bracket, providing immediate tax savings.
  4. Creating a Balance: Instead of choosing an all-or-nothing approach, you might want to consider a balanced approach where you contribute a comfortable amount to your 401(k) while making more than the minimum payments on your student loans.

The decision to invest in a 401(k) without an immediate match or to prioritize high-interest student loans is a personal one and depends on several factors. It can be beneficial to speak with a financial advisor to discuss your specific situation. Remember, the best financial plan is the one that aligns with your financial goals and gives you peace of mind.

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  • Lily Kensington

    Lily Kensington is a financial psychologist, a proud member of the ANZA Psychological Society, and a passionate advocate for financial wellness. A former high school English teacher and psychology graduate, Lily brings a unique perspective to her writing that blends the intricacies of psychology with the world of finance.Over the past decade, Lily has dedicated her life to helping individuals and couples navigate their emotional relationship with money. Her empathetic and intuitive approach, honed through her counselling practice, breaks down complex financial concepts into relatable and practical advice. Lily's writing often reflects her personal journey as a single mother, providing valuable insights and support for fellow single parents navigating the world of personal finance.In addition to her numerous contributions to wellness and personal development blogs, Lily is the author of the book "The Heart of Money: A Psychological Guide to Financial Wellness."In front of the camera or behind the pen, Lily's mission remains the same: to help others achieve financial peace by understanding the psychology of money.

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