Paying debt and saving money are very important financial goals. These are also the steps you need to take to reach a larger life goal – living well during retirement.
You want to retire without debt, but focusing on paying off debt can now mean you have to sacrifice your retirement savings. But how do you choose the best place to spend your money?
A problem that only pays the debt
If you pay off your debt first and put no money into savings, then you have nothing but your credit cards to recover if there is a financial crisis.
Unfortunately, you can count on some kind of expense to come, and that’s usually when you least expect it. Using your credit cards to fund an emergency only makes it difficult to pay off debt.
Postponing savings pensions will have negative consequences. The longer you wait to start saving, the more you have to put aside each month to meet your retirement goal. If you start saving early, you will benefit from years and years of compound interest on your investment.
And a problem with just saving
On the other hand, if you save first and do not focus on paying down debt, you will end up spending money on credit card interest. Because credit card interest rates are often higher than interest rates on savings, you end up spending more money on interest rates than you earn on your investment.
The second problem with keeping the former is that you run the risk of retiring with debt. You may find that you cannot live comfortably on your savings and continue to pay your debt.
So you would have to live uncomfortably and pay your debt or go back to work until you paid off your credit cards.
When saving can be more important
If you do not have an emergency fund or current savings, you can quickly access it in an emergency, then build it for a few months. The ideal emergency fund is six to twelve months of cost of living, but it can take several years to build this type of savings.
In the short term, focus on building a small $ 1,000 fund. That money will cover a lot of small emergencies like car repairs that would otherwise be charged to your credit card. Once you start your emergency fund, then you can focus on paying off your debt.
Take advantage of your employer’s offer to match your Good Finance plan. Do not deduct free money. There are also retirement savings tax credits. Money that contributes to Good Finance can often be deducted from your taxable income, resulting in a lighter tax burden. Even if you take advantage of an employer’s 401k match, you may be able to cut back on spending and still spend a significant amount of money paying off your debt.
From a financial standpoint, if the interest rate on your debt is lower than the interest rate on your savings or investment, then you would get a higher return on your savings as opposed to paying off your debt. This is often the case with low-interest student loans. Even so, debt is long and even low-interest-rate debt lowers your net worth and makes you feel burdened.
The answer is both
Lastly, you should find a balance between the amount you spend on debt and the savings you make each month. It is not wise to delay either of these instead of the other, so there was a way to split your money between the two.
For example, if you have an extra $ 1,000 each month, you can put $ 500 toward your debt and $ 500 toward savings.