How to balance debt and invest for retirement

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Who could say no to free money? Generation Y. Fewer than one-third of all eligible workers between the ages of 18 and 25 participate in their company’s retirement plan, according to a survey by human resources research firm Hewitt Associates. They’re losing free, steadily increasing funds from employer-matched contributions.

It’s not hard to see why retirement savings has taken a back seat to other obligations. In the past decade, the average level of debt for a graduating college senior has more than doubled. Student loan debt tops $20,000 for 2008 graduates, who also carry an average credit card balance of more than $3,200, according to The Project on Student Debt, a Washington, D.C.-based nonprofit organization.

Nicholas Aretakis, author of “No More Ramen: The 20-Something’s Real World Survival Guide,” says this is testament to why it’s important for younger employees to develop long-term savings habits early. “It’s crazy for any employee, even under financial strife, not to save for the future,” he says. “Many feel that they cannot afford to invest when actually the converse is true — they cannot afford not to invest.”

5 tips to savings without going broke now
Prioritize your finances
Due to lack of experience, young workers often don’t know which bills are most important. This obstacle sometimes prevents them from saving.

To make your money stretch, author Nicholas Aretakis recommends prioritizing your bills, placing absolute must-haves first, such as rent, health insurance and groceries, then ranking secondary expenses, such as credit card debt, car payments and student loan payments, in order of highest to lowest interest rates.

When factoring in money for retirement, Aretakis encourages those under 30 to consider the investment returns they’ll miss out on by not contributing early — stocks historically averaged 10 percent over the past several decades. They should also consider the tax savings they’ll gain (28 percent on average nationwide) by throwing money in now.

“It doesn’t make any sense to pay down (student loan) debt to save 7 percent on interest (the average maximum interest rate for most federal student loans) when the common 401(k) plan returns an average of 28 percent of your investment and that’s before any employer matching,” Aretakis says.

“Pay down your credit card debt right away. Then contribute everything you can to retirement.”