Best Practices for Balancing Retirement And Debt
Are you hesitant to start saving for retirement due to daunting debts and interest payments? We understand it’s challenging to start a retirement fund when you have credit card bills, student loans or mortgages to pay off. The answer to this common question requires you to consider many factors such as your age, life events, income, spending behaviors and total debt analysis.
Influences such as age will determine the priority level of your retirement fund. Upcoming life events such as having a baby or buying a house will also help determine how much you can set aside. It is also wise to note your income and spending trends, as these are essential indicators of how much you can put towards your savings. Lastly, calculate your total debt amount along with monthly payments to determine how long it will take to pay off your debt entirely.
In some circumstances, it makes more sense to save your money for retirement rather than to pay off debts. If you are older or nearing retirement age, it makes more sense to prioritize your retirement fund. Another situation would be if your employer is willing to match your 401(k) contributions, which could make up for the interest you owe on unpaid debts.
On the other hand, sometimes it makes more sense to pay off debts before saving for retirement. Less debt means less interest paid, and more money for your retirement fund. Credit card interest rates are generally high and the benefits of most retirement plans will struggle to overcome the cost of recurring credit card interest rates. If you work to pay off debts and don’t acquire new debt, your expenses will decrease each month and open a path for retirement saving. Also, lower debt can boost your credit score, which is important if you are planning to buy a home or car because it could better your interest rates.
Your financial situation is independently unique and will not be identical to anyone else’s. If you are struggling to prioritize saving for retirement or paying off debt, here are some steps to follow:
- Start an emergency fund equal to your living expenses for three to six months. This is useful if you lose your job or become ill and cannot work.
- If there is a matching contribution from your employer, put money into a 401(k) or another retirement fund. This will offset any interest costs associated with your debt.
- Start saving for other purposes such as down payment for a house, retirement fund or college tuition for your children.
Everyone’s financial situations are different, there is not a set rulebook for whether you should start saving for retirement or pay off your debt instead. The steps above can serve as a guideline for what is best for your situation, however, if you need individual advice Blue Water Capital Management is here to guide you.