Should you put retirement savings first, or is it better to be debt-free? Or is a combined effort your best plan of action on your quest for financial health and security? The answer, of course, depends on your unique circumstances and financial goals.
Pros of Paying Down Debt
Some debt is better than others. A mortgage means you’re investing in a lifetime purchase as well as a literal roof over your head, and school loans mean you value education, which will propel you to greater success and higher earnings in your career.
High-interest credit card debt, on the other hand, isn’t useful. And thanks to compound interest, credit card debt will only increase unless you tackle it as soon as possible. If you’re buried under suffocating high-interest credit card debt, you might want to focus any extra money you can into unburying yourself.
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The Benefits of Saving
You should put saving for retirement as your first to-do on your financial planning agenda if your company or employer will match your financial contributions to a savings plan or 401(k), according to NerdWallet writer Andrea Coombes.
“Say your employer offers ‘100 percent up to 2 percent of salary.’ That means your employer will add one dollar for every dollar you contribute, up to 2 percent of your salary. So if you make $60,000 and contribute 2 percent of it, your employer will add $1,200 a year on top of your $1,200 contribution,” she writes.
One caveat to investing in an employer-matched plan, according to The Balance writer Melissa Phipps, is if you think you’ll change jobs before you can benefit from what your company puts into your retirement account.
If an employer-matching plan is not an option, an individual retirement account (IRA) is an alternative to consider, adds Coombes. You can choose from a variety of IRA types, including a Roth IRA or regular IRA. Doing some research will help you decide which will work best for you.
Related: Should I pay off my mortgage before I retire? >>
Simultaneously Saving and Paying Off Debt
If putting all of your eggs in the retirement saving basket or toward your debt-busting efforts doesn’t make sense for you, do both. You can put a little into your future nest egg while chipping away at your debt. This allows you some creative financial control.
And whether your debt comes with a high, low or moderate interest rate, you can still make significant gains in reducing your debt while saving for your retirement. Two-thirds of the money you plan to split between savings and debt should go toward paying off high APR debt, according to U.S. News & World Report writer, finance author and credit card expert Beverly Harzog.
If your debt has a low APR, she suggests earmarking two-thirds of the money for your savings plan. The moderate APR debt is the simplest division — 50 percent for savings and 50 percent for debt payments.
“A retirement plan should be as much a part of the budget as your rent, car, cell phone and cable. Debt may come or go, but retirement should always be a priority,” said Phipps.
Regardless of which takes a higher priority at the moment, both saving for the future and paying for the now is crucial for your financial security.
So, if you’re struggling with high-interest credit card debt, it might be best to focus on decreasing that debt first. If your debt is manageable, it might make sense to start planning for tomorrow, especially if you have an employer that can back you up.
Get Help Planning for Your Future with Minster Bank
Take a good look at your finances, your budget and employee benefits to discover what the best course of action is for a healthy financial present and future.
Need help with retirement planning or figuring out a savings plan to help you accomplish your goals? Minster Bank’s team of expert financial advisors can help. Contact the team today and get started on the path to better financial wellness.
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