It’s a difficult choice between repaying your debt and saving for your future retirement. Which one do you choose to get the maximum benefit and results? Let’s get our house in order!
If you have a debt and also want to save for retirement, consider this easy process:
1. Examine your debt.
As you analyze your debt, pay attention to interest rates and fees. Calculate how long it will take you to repay the debt under various payment schedules. I am a big fan of the “Snowball Debt Elimination Method. We all need small rewards, by paying off the smallest debt first and then rolling that payment into the next lowest debt until it is paid off is emotionally and mentally rewarding more so than paying off the highest interest rate first.
- It’s important to have a clear picture of your debt before trying to choose an option
- Do you have an emergency fund? Not having an emergency fund for the incidentals that come up in life, such as a car repair, medical expense or home repair, can greatly impair any plans you have for paying off debt or saving for retirement.
2. Examine your retirement savings.
Note how much you’ve already saved, and how much you may need in the future. You can find online calculators that help you estimate the cost of living for your retirement age.
- Also consider how your work handles retirement plans. Are you enrolled in a pension plan or other programs?
3. Calculate your percentage.
What percentage of your paycheck actually goes to retirement plans? Experts recommend that you put at least 15% of your pay into a plan. However, you may need a higher or lower amount based on your lifestyle and location. If you can not contribute 15% of your income to your retirement plan, then you have too much debt. Paying off the debt first would be the priority until you could easily put 15% percent away for retirement.
4. Consider financial counseling.
Would you benefit from meeting a professional counselor who can go over your finances? Financial planners can help you see how to best manage your money, based on your own situation.
- If you’re having difficulties making a decision, then you may want to turn to professionals. They can help you examine your debt and retirement savings. They can assist you in building a plan to balance your financial circumstances.
5. Consider the impact of your debt.
Do you have your debt under control, and can you make payments on time? If you’re struggling to stay ahead of the fees, then you may want to repay the debt first.
- You may want to consider the impact of losing your job on the debt. A job loss or other situation, such as a medical emergency, may affect your ability to pay the debt.
- If you fall behind in your debt, then you may face high fees, court orders, wage garnishments, and other consequences. You may also be faced with the decision of filing for bankruptcy.
- On the other hand, not saving for retirement may hurt you in the future. However, it’s unlikely to hurt your current financial situation or hurt your family now.
- Unless your investments pay a higher interest rate than your debt costs you, experts recommend taking care of debt before putting extra money into retirement savings. You’re losing money every month to fees and interest rates. You may also want to try to make payments for both the debt and the retirement for a more balanced situation.
6. Make the decision.
Ultimately, the decision to repay your debt or save for retirement is in your hands. Although you may get advice from family, friends, and experts, you’ll be the one facing the consequences of either choice, so you’ll want to think carefully before you make a decision.
- You may want to try to make the traditional pros and cons list to consider your options.
Before you pick paying your debts or savings that money for a retirement plan, you may want to weigh your options. It’s important to consider the benefits and consequences of both financial decisions.