Should You Prioritize Saving Up for Retirement or Paying Down Your Debts? By Don Fletcher
Many of us encounter the dilemma of figuring out if we should be putting our money toward paying off our debts or saving up for retirement. And many of us might not have enough money to cover all our financial necessities.
Then what should you do? Should you pay off your debts first or put money into your retirement contributions?
Well, the best thing to do is to do both, if possible. At least contribute enough to your workplace retirement plan to receive the maximum match, if offered. Then take what you have leftover to put it towards your debt.
However, this isn’t always possible. So when it comes down to choosing one or the other, it depends on certain factors, like your age, if your workplace offers a contribution match, how much debt you have, and the cost of holding that debt over time.
Though it is important to save as early as you can, when it comes to age, if you have decades between you and retirement, you are in a better position to focus on just paying down your debt and creating an emergency fund.
It can be crucial to take care of the debt first as interest rates on new credit cards are currently around 17.3%, on average, to 24.54% on maximum average.
If you have debt that has high-interest rates, you will be better off getting rid of that burden instead of saving up for retirement. As you are also paying off your debt, be sure to set aside money for emergencies as a prevention method of having to use more credit or borrow money.
Once those essentials are taken care of, you can put all your attention on your retirement contributions.
It also makes sense to take care of your high-interest debt first when you have a lot of time before retirement because the market returns are not set. So during times when the market is volatile, a lot of the time, the interest you’ve earned from your retirement contributions is less than what you would have saved paying off your debts.
Now, if your employer is matching contributions, try to at least meet the minimum to get the max contribution match, as that will be free money towards your retirement you would be passing on if you fail to do so.
See if there are any other monthly expenses you can cut before allocating where your money can go. For instance, if you eat out every day for lunch, you may save more cash by making packed lunches.
When it comes to older Americans, if you do not have a lot of years between you and your retirement, you won’t have the power of compound interest as significant as someone who has decades before retiring. In this case, it may also be in your interest to take care of as much debt as possible that has high-interest rates and save up to 6 months of pay for an emergency fund.
Then go full-throttle on putting money into your retirement contributions and take advantage of the extra catch-up contributions if you are headed towards reaching the annual maximum contribution limit.
Remember, if you have matching contributions offered by your employer, be sure to at least meet the necessary amount to receive it.
No matter what boat you’re in, be sure to have your strategy and plans detailed out. Be sure to specify how long each strategy will take so that you stay on point.