My last post gave a detailed explanation of my budget, something I've been constantly warping and changing to fit me needs. Well, today I think I've decided to re-work it a bit again in regards to my loan payments and my retirement accounts.
First, let's look at this handy graphic that constantly floats around financial forums. It's a suggestion of how to allocated your retirement savings, beginning from the top and then working towards the bottom...
What I've been doing that goes against the chart, is I've been contributing to my Company 401k that is not matched instead of putting that money towards my debts first. The chart suggests that since I have an emergency fund saved, my first step would be to pay off all of my debts (since my company does not 401k match), and than after I pay those off, I should begin to contribute to my individual ROTH IRA (once I contribute more than the $5,500 limit in one year, I could then contribute to my company's 401k instead).
I realized that I should probably be following the chart, but part of me is scared to wait to start saving for retirement until I'm near my 30's. But plenty of people don't start saving until then, or after then, right? Well, I'd like to not be plenty of people.
So to convince myself tha I should follow the chart, I once again went to unbury.us to see the numbers.
Here is the chart that shows what I currently pay per month (about $600)
The big thing to take away here, is that I'd be debt free by May 2023, and I'll have paid $14,855 in interest. Now, let's take a look at a chart where I'm paying $1100 per month (that's the $600 I already pay plus the $500 I usually give to my retirement accounts). Here's the new chart:
In this scenario, I'd be debt free by September 2018, and only have paid $6,511 in interest.
The point of the unbury chart is to illustrate why the retirement savings graphic rings true. The difference between the interest amounts is $8,344. I'd be saving myself $8,344 by paying the loans off faster. The key here is that if that money was still going to my retirement account (like it is now), there is no way of knowing that the account would gain more interest than my loans are currently gaining interest. From my research, it's advised that unless your loan interest rate is under 3%, you should not gamble on the market and hope that a high return occurs on your 401.
So as of next month, I will stop contributing to my retirement account completely, and focus on getting my loans paid off by September 2018, the month I'll turn 28. At that point, I'll be free of $1100 I'd be giving to my loans, and I can then begin to contribute heavily to my retirement funds to make up for the time lost.
If you'd like some more detail about how the first graphic works, please visit here for some great information on basics!
