Ask Farnoosh: I Have $4,000 in Debt and No Retirement Savings. What Should I Do?

Aylissa on Facebook writes: I will be 30 years old in August and I am struggling with debt. I have mostly credit card debt of $4,000 (all on separate cards). However, I also want to invest in an IRA or some type of retirement account but never seem to have enough money left over. What should I do? Continue to pay down my debt? Or go ahead and invest in an IRA? (Also, I do not invest in my company's 403-b.)
 
Hi Aylissa,
 
Turning 30 without at least the beginnings of a retirement savings plan worries me. Timing is critical to the process; the earlier you start investing, the likelier you are to reach your retirement goals. The best advice I ever got when I started my first real job in my early 20s was to invest automatically in my company’s retirement plan. At the time it sounded impossible, as I was making pennies, but the magic of putting saving on auto-pilot is that it’s relatively painless. The money is invested from each paycheck before it ever reaches your hands – a very good thing.  You just make do with the paycheck that you take home and I found it to be a small trade-off given the thousands I had saved in just one year. So that’s my first bit of advice to you – get on an automatic savings plan with your employer’s 403-b. If there’s any matching program, say, offering you 50 cents for every dollar you invest up to a certain percentage of your income, take advantage of it. It will help you to save more aggressively with free money. Commit to saving about 10% of each paycheck.
 
What worries me less is your $4,000 in credit card debt. Some extra income through a side gig (check out: taskrabbit.com, tutor.com, care.com) or a $10-a-day reduction in spending (or a combination of both) should be all you need to be debt-free in about one year’s time. Have you looked into these options? You may need to do a little lifestyle adjustment for a while, but if you prioritize this and devise a strategy, you’ll be out of debt by this time next year.
 
Along the way, it can also help to make your goals known to family and friends. Studies show peer pressure actually helps savers stay on track. In a 2012 paper for the National Bureau of Economic Research, researchers found that participants who saved money in a self-help treatment group, where they publicly announced their savings progress, saved 3.5 times more often and had nearly twice as much banked as those who kept quiet.
 
Garrett emails: My wife and I are in our mid-20s. We have been married for 4 years and we have a 3-year-old son. We want to start saving for a house, but we have student loans that we are on track to pay back in about 7 years. Should we put our extra income into paying down that debt (which is at about 7% interest) or save our money and try to combine the student loans with a home loan? What's your recommendation? Thanks for your advice.
 
Hi Garrett,

My feeling on student loans is this: If you can manage to pay the monthly minimum easily without scraping by, then no need to alter your life’s goals. The 7% interest is, of course, higher than any savings account will yield these days, so, mathematically speaking, paying off your student loans quickly would be a wise move, but I don’t see the need to sacrifice savings if you can comfortably manage this debt. Instead, commit to staying on track with the 7-year payoff and use your extra income to save for a future down payment. If you happen to have some additional income leftover after saving every month, then, sure, use that to further knock down the loans. If you haven’t already, I’d also recommend automating each student loan payment so you never miss a payment and so you can earn a 0.25% rate cut.
 
And note: while you can’t simply consolidate a student loan with a home loan, as you point out, you may be able to secure a home equity line of credit (HELOC) to pay off the student loan down the road, once you purchase a house and only if you have enough equity. As I’ve mentioned in the past, some banks are shifting away from the HELOC business, but if you do happen to secure one, make sure the interest rate is fixed and, of course, below 7% to make the move worthwhile.
 
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.