5 Easy Steps to Pay Off Debt and Save for Retirement—Let’s Talk!

Steps to Pay Off Debt and Save for Retirement
Steps to Pay Off Debt and Save for Retirement

What is your major financial objective? Is it to pay off debt or to save for retirement? It’s not simple to decide. But the good news is that the choice does not have to be absolute. It all comes down to finding the balance that works for you.

The reality is that you’ll need to give saving and spending equal priority, regardless of your income or stage of life. This article explains how to set priorities when you have additional money. Read on!

Should You Pay Debt or Save for Retirement?

Personal finance can’t be generalized. You can make any financial decision depending on your financial condition only. Nevertheless, there are certain basic principles which can help you to make correct financial choices. So let’s check out when increasing debt repayment is ideal and when you should prioritize retirement savings.

Ideal Circumstances to Prioritize Debt Repayments

It’s worth paying off debt as soon as possible if it is a high-interest debt. Any debt with an interest rate over 9-10% is a high-interest debt. The most common examples are personal loans and credit cards. Sometimes, interest on them reaches up to 20%. So, prioritize paying these off before raising retirement contributions.

One critical aspect of debt is that it can be a reason for anxiety and an emotional burden for some people. If you are also like that, it makes sense to pay off your debts first, even if it is not the most financially wise move.

Ideal Circumstances to Prioritize Saving for Retirement

There are certain circumstances when it’s better to save for retirement, even if your debt continues. They are as follows:-

  • If an Employer 401k Match is Available to You

You shouldn’t turn it down if your employer offers a 401k match. It’s essentially free money from your employer. And over time, it may mount up significantly.

It’s beneficial to contribute as much as your company match while still paying off debts. Generally, it is a few percent of your salary. It is also recommended to know the 401K contribution limits for tax benefits.

  • If Your Debt is Going to Last Long

You would want to go all-in and pay off your debt soon if you only have a small amount that you can pay off rapidly. But it might be beneficial to start saving for retirement if you anticipate paying off debt for many years.

The longer your money is in the market, the better because of compound interest. Moreover, your retirement contributions have the most chance to develop in those formative years.

  • If Your Debt is Low-interest

Even while paying interest on debt can seem onerous, the payoff might be worthwhile if your money can earn more on the market. It is best to utilize any extra cash you have to invest in mutual funds or bonds, which can provide you with 7-10% interest rates.

Spending all your money on paying off low-interest debt may leave you with little savings and investments. And that, too, would not be of much worth after a few years due to inflation. Only high-interest and wise investments can help you beat inflation.

5 Steps to Pay Off Debt While Saving for Retirement

Let’s discuss the balancing act of paying debts and saving for retirement simultaneously. Does it sound overwhelming? It sure is! But it is possible through proper planning and strategizing of your finance. Here are 5 steps or tips to help you achieve this feat!

  • Evaluate Your Budget

The more flexibility you have in your spending plan, the quicker you can pay off debt while continuing to save money every month for retirement. Determine where your money is going right now. Then you can decide where to make savings, so you have more cash to put aside.

Related: Best Budgeting apps you should use

  • Have an Emergency Fund

It’s ideal to pay off your debts while putting your savings in an emergency fund. To save money before paying off high-interest debt may seem contradictory. But think of it this way – Without an emergency fund, any financial disaster would only force you to incur more high-interest debts such as personal loans or credit card debt.

  • Make the Most of Your Tax Benefits

Certain tax benefits are associated with retirement savings, such as pretax contributions to traditional IRAs and 401(k) plans. Additionally, you can deduct the first $2,500 of your annual student loan interest from your taxes. Figure out the “saving to debt repayment ratio” which yields you the most tax savings.

  • Create a Debt Repayment Strategy

You need a robust plan to tackle your debt effectively. Outline how much extra you’ll put toward debt each month. First, you must organize your spending and set a monthly target. Also, set your retirement goals and ensure you are on track to meet them as well.

  • Speak With a Financial Expert

If all this still sounds overwhelming to you, ask for help. You can talk to a professional financial analyst to know where you stand. An expert can also walk you through your options.

Author Bio

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years, he has turned his focus to self-directed accounts and alternative investments.

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