Debt vs. Retirement: How to Balance Both

Debt Solutions

Debt vs. Retirement: How to Balance Both

It is everyone’s dream to have a comfortable retirement. That is, we all desire to get to a point where we do not have to work to earn a living yet we can relax and relish the pleasures of life without undergoing financial stress. Even then, you cannot attain financial freedom when you are in debt. How then can you strike a balance between paying off your debt and saving for retirement? Although this is complicated, retirement planning is achievable.

Here are some things to consider when you are trying to balance between debt management and retirement savings:

Know Your Net Worth

Knowing the balance between your debt and savings helps you to measure progress without feeling overwhelmed by the numbers. This is because having knowledge of where you stand helps you understand that it is a point in your financial journey, hence it can be changed positively over time.

Establish The Interest Rates For Your Debts And Prioritize Payments

When taking note of the interest rates, be sure to include credit rates. This is important when it comes to prioritizing debt payment against the probable growth of your retirement contributions.

Check Your Ability To Refinance Your Loans

Mortgages and car loans usually attract low interest rates so you may consider refinancing.

Set Aside An Emergency Fund Before Making Any Financial Move

Although it is a huge contradiction to think of building a savings cushion while you are in debt, it is an important move in avoiding the debt trap. Thus, you can make small savings even as you make minimum payments for your debt. Financial experts recommend that you save up to three months of your living expenditure. You will do well to save systematically while you pay debt by creating milestones.

Maximize 401k or 403b Match

If you work for a company that matches your 401k, have been saving for an emergency and are making minimum payments for your debt, you will do well to take advantage of this free money from the guaranteed 50% return. This is a universal reality regardless of your debt or age. Ultimately, keep in mind that the emergency fund is supposed to protect you. If you run into financial trouble and do not have any saving, you are likely to go further in debt. On the other hand, taking your 401k might attract a penalty.

Determine The More Important Goal

Once you have established your emergency fund and have taken advantage of free money, the balance of saving and paying off debt is not black and white. Debt is a big priority. However, you need to ask the following questions to determine how you will prioritize your retirement:

How Soon Are You Retiring?

If you are retiring soon, then saving will be a priority. Even then, the amount of money you will save will depend on your debt payments, when you are retiring and income. There are three ways to help you prioritize; the mathematical answer where you put money where it will have a remarkable impact, the emotional answer where you hate debt hence will even pay low interest debt, and hybrid approach where you pay some debt and invest some money. While most people opt for the mathematical approach, the hybrid approach is far much better.

What Kind Of Debt Do You Have?

You need to add all your debts and pay attention to the interest rates. Should you establish that your interest rates are extremely low, you can postpone as you save. You may then come up with a monthly debt repayment schedule but pay from extra income.

What Does Your Credit Look Like?

If you are looking to boost your credit score, then you may want to focus on your debt. Credit utilization comprises of 30% of your FICO score and the lower your credit ration the better score you will have.

Overall, you will do well to contribute to both debt and savings at the same time. However, you also must be able to tell the one that is a priority in order to come up with a proper plan.

If You Don’t Qualify For A 401k Company Match, Reduce Expenses

If you are able to increase your income but maintain a modest lifestyle. This is because they can easily put more towards their financial priorities thus being able to make progress.

Increase Your 401k Contributions Or Save For Retirement In A Roth IRA

If you can put extra money in your retirement while you pay for your debt, consider contributing to retirement in a Roth IRA. This retirement account presents big benefits. For instance, as you pay taxes on your contribution, you will not be required to pay on your earnings that may be substantial. However, you can skip the hassle of opening a Roth IRA if your financial philosophy is inertia. Instead, set up transfers and opt for investments.

How To Set A Balance?

How do you balance between debt payment and saving for retirement? You will do well to have a budget that will help in accounting for living expenses as well as discretionary spending. It is important to then decide the amount that will go towards the debt as well as the amount you can put in retirement as summarized below:

  1. Draw a basic budget and determine the amount you have for your financial goals
  2. Include minimum payments on your debts
  3. Subtract the minimum amount you need for debts from the money you have for your financial goals
  4. Determine the amount you will allocate to each of the financial goals. Generally, high interest debt should be allocated more while you can adjust the percentage of the other debt depending on various factors.

Overall, you may want to set a milestone for your savings in order to increase your debt payment and reach for your savings goal. Alternatively, you may consider paying off a certain amount of your debt before increasing your retirement contribution.

Ultimately, paying your retirement savings and getting out of debt are both important financial milestones, hence striking a balance is no mean feat. However, you can analyze your situation and come up with a plan that will help you come to a compromise while ensuring you have made a smart financial decision.