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I pay $850 a month on my student loans and put $300 a month into my 403(b), and I'd like to buy a house in two years. Should I try to save more in my retirement plan or pay off the debt more quickly?
"Neither," says F. Dennis De Stefano, a financial planner in Mauli. If you really want to buy a house in two years, you need to start saving for the down payment. De Stefano recommends putting a dollar figure on that goal. If, for example, you'll put 10% down on a $125,000 home, you need $12,500. Our How Much Should I Put Down calculator can help you figure out the amount. Then determine how much you'll need to start saving each month to reach that goal within two years. Use our What Will It Take to Save for a Car, a Home ... calculator to run the numbers with a few potential interest rates.
If you have enough income to save for the house while you contribute to your 403(b) and pay off your student loan at your current rate, that's great. Otherwise, you may want to cut back temporarily on your 403(b) contributions and divert the cash to your down-payment fund, says Barbara Steinmetz, a financial planner in Burlingame, Cal. Try not to dip below the level needed to capture 100% of your employer's matching contributions. Remember, too, that because pretax money goes into the 403(b), you won't see a dollar-for-dollar pay raise as you cut back on contributions.
One caveat: Depending on your income, the student-loan balance may adversely affect your eligibility for a mortgage. If you talk with a few potential lenders and find out that your debt is already too high to qualify for a good mortgage, you may want to decrease your 403(b) contributions still further and increase your student loan payment for a while. Also see if you can lower your student-loan interest rate. That could shave additional money from your monthly payment and free up more cash for savings. For more information, see Take Charge or Save or Pay Down Debt?.
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