This is the most popular question in retirement planning. Should I pay off all my debts or should I put my money towards my retirement? Overall, it depends on your own financial situation. If you have a large amount of high interest debt, you should work on paying that off as soon as you can because of the high interest rate. While prioritizing debt repayment, you should still put money toward your retirement savings, no matter the amount. Something is better than nothing! It is in everyone's best interest to prioritize both paying off debt and savings for retirement. Continue reading for more information as to why you should be focusing on both of these payments.
Create a monthly budget for yourself to specify how much you need to allot to your debt payments to keep yourself in the green. With this monthly budget, you will be able to see what extra money you have left to contribute to your retirement. This is extremely important for younger people to have time on your side with retirement savings. The longer you have to allow your money to compound, the more money you may have available when you are ready to retire.
Separate your high interest debt from your lower interest debt. High interest debt includes credit cards and student loans. Low interest debt is your mortgage. Try to put extra money towards your high interest debt payments to pay it down faster and save money. Do not put more money towards your low interest debts because you are better off making the standard payments. Mortgage interest is tax deductible so that is helpful in lowering your tax burden.
Check with your human resources department if your employer offers 401(k) to make sure you are taking advantage of all of your benefits. If you are focusing on paying down debts, make sure you are contributing enough money into your retirement savings to reach your employer's maximum requirements for matching. You can nearly double your contribution amount each year by utilizing your employer's matching system.
Setting goals for yourself helps you have a number to work towards for your debt reduction and retirement savings. You can use these goals to plan out your monthly payments for debt and retirement savings. These goals and planning will get you to a manageable debt ratio. Once you meet your first goals, make more goals for yourself to pursue financial freedom.
Using a financial professional will help you keep track of your goals and pursue them in a way that works for you. They will be able to give you advice based on your specific financial situation. They can take you from where you are to where you want to be. It is never too early or late to get started on your journey to your financial future.
Sources:
"7 Steps to Pay off Debt and Save for Retirement." Principal, https://www.principal.com/individuals/build-your-knowledge/7-steps-pay-debt-and-save-retirement.
"Paying off Debt before Retirement." Vanguard, https://investor.vanguard.com/retirement/planning/paying-off-debt.
Sullivan, Bob. "Should You Pay off Debt or Save for Retirement?" Forbes, Forbes Magazine, 18 Aug. 2022, https://www.forbes.com/advisor/retirement/pay-debt-or-save-for-retirement/.