Assume you are an average 25 year old with $25,000 debt (on account of your student loan) You have been given a lump sum $10,000 and the following four choices:
- Invest it for your retirement funds.
- Save/invest it for your future home.
- Save/invest it towards your child’s/children’s future college education.
- Pay part of your student loan debt.
You can pick only one of the above choices towards which you should use the entire $10,000. Which one will you pick? ..and Why? Assume that the rate of return on the three investments choices is the same and the student loan charges you an interest rate that is equal to this rate of return. Would your answer be any different if the amount was $25,000 instead of $10,000? Again, you can pick only one of the choices.
Well, first of all, I’d stomp on the floor and start whining “Who says I can only do one of those things?” After my tantrum subsided, I’d give my answer:
Invest for retirement. There’s no day like today, so this would be my very first choice for the money. Sock it away. Also, I believe that you really shouldn’t put your children’s education before your own retirement. Like Suze Orman pointed out – there are plenty of loans and scholarships for college, but there are none for retirement. It’s the same for a house: you can get a mortgage on your home, but not on your retirement. I don’t really have a solid excuse for choosing this over the student loans (assuming the interest rate is equal to the rate of return) – at that point, it’s just a personal choice.
So, would it change at $25,000? I believe so. I would pay off the student loans completely, and take the extra “income” each month from not having to pay them, and start dividing that money up into savings for retirement AND a house. Haha, I beat your little “you can only choose one!” system, didn’t I?