This is college graduation season and there seems to be no shortage of advice being offered to graduates. Last week I heard about a graduate with a nice job offer who was advised to pay off student loans before participating in the company 401-k plan. While striving to be debt free is a laudable financial planning goal, I strongly disagree. Here’s why:
Today’s graduates have something that their parents don’t have—time. Once missed, one can never get back the lost employer match, the tax deduction, and the tax-deferred growth. Assuming an 8% hypothetical investment return and a $100 company match, $100 invested each month into a 401-k plan can grow to $117,800 in 20 years. If you waited for 10 years to get started, it would take an extra $444 per month plus the $100 company match to catch up. Meanwhile, you will have missed out on the income tax savings, which actually lowers the cost of your monthly investment.
So yes, chip away at your debts and don’t squander money. More importantly, don’t squander the time you have available to save for the future. Most people are good about eventually paying off debts, but fewer are good about paying themselves first.