The average financial advisor's advice is meant for the average person. That is why a lot of them will give us bad advice.
For example, many of them will tell us to max our 401k out before paying back student loans. For the average person, that makes sense because
1. they do not have > 6 figures in debt
2. They can reduce their AGI so they can take advantage of a lot of deductions
3. They most likely will pay less taxes in the future
For us, using that money to pay off the principle off student loans helps us save 6.8% in interest. That is 6.8 percent return TAX FREE! Also, no matter how much we reduce our AGI, we will still be above 60-80k so we can not deduct things. Also, we will most likely be paying a lot more taxes in the future because we make too much and will likely have other forms of investments. Plus, the government will probably tax us more in the future also.
For us, we should only put in enough for the company match, and then invest the rest else where from paying off loans to property investments.
You're making my eyeball twitch! THIS ^^^^ is "bad advice".
It makes sense even more the more money you make. 401k first, especially if you are single. That's a 28% tax savings (deferred actually) right there, much better than saving 7% on loans. THEN, that $17,500 401k money you saved, is probably earning close to if not more than the 7% that is on your loans, basically paying that interest for you.
If you marry your tax rate will go DOWN in the future, especially if your spouse stays at home. You may begin to deduct interest again because the threshold rises from 80k to 160k for married couples for student loan interest.....off Modified Adjusted Gross Income (after 401k contributions and some other misc items).
The 28% bracket (the amount paid on your top dollar of adjusted gross income) for single people is $89,351 to $186,350, for married couples its $148,851 to $226,850.
Even if your spouse works, the ability for both of you to save $17,500 ($35,000) total of your income (employer match is separate) takes a big chunk off your AGI, and could easily be in the 25% tax bracket when married. Buying a house? Even deeper into the 25% bracket.
The game is about net worth, not debt. Add up your assets, subtract your debt the resulting number is the one you should be concerned about. It's all about not spending the money in the first place, once you accomplish that whether it goes into a 401k or towards debt doesn't have that much of a difference.
That being said, maxing out your 401k will save you $4900 a year in taxes ($17,500 * .28). That $17,500 will only be $12,600 on your paycheck due to income tax. So if you apply that $12,600 to your loans you will save $882 in interest that year....vs saving (deferring) $4900 in income tax.
Also, keep in mind, your $17,500 is earning interest in your 401k account, about $1200 a year at 7%, more than offsetting your student loan interest of $882 on the $12,600 you were able to pay off.
None of this even takes into account any match from your employer. Then its even better.
