Choosing between saving for retirement or paying off debt
You work hard, and you've got a bit of money stashed away. But you also have a daunting amount of debt from student loans, credit cards or medical bills. Unfortunately, for many people, after taking care of the basics-bills, food, rent-there's not much left to put toward retirement and paying off that debt.
This is a common problem. Not only do 42 percent of Americans not have enough saved for retirement, but in 2018, Americans hit their highest levels of debt ever, surpassing the numbers that rose in the wake of the 2008 economic crisis. When it comes to the question of deciding to pay off debt or save for retirement first, there is no easy answer. While every situation is different, there are pros and cons to each scenario that might help you make smart decisions when it comes to taking control of your finances.
Paying off debt first
Logically, paying off debt first feels like a reasonable choice, and there are many reasons why people take that approach. So let's look at them. If you have high-interest rate debt like credit card bills, then you're likely paying more over the long run to keep up with your minimum payment. In this case, it might make sense to pay down those high-interest rate loans first. Additionally, paying off debt is not affected by stock market volatility. While bull and bear markets typically impact investments, changes in the market generally won't impact your debt. There's also the emotional aspect, too. Many people struggle under the burden of debt. Reducing or removing a considerable level of debt can help relieve stress over the long term. Now, when it comes to paying down debt, there are a couple of things to consider on the other side of the equation. Focusing solely on debt pay down doesn't leave much room to save for emergency funds. This is something that's especially important when many people are living paycheck to paycheck with little, or no, money set aside. Also, when it comes to paying off debt, if you have low balances, you may have an opportunity to make a significant commitment to both retirement saving and debt elimination.
Saving for retirement first
Retirement matters, so saving for it isn't something you want to put off for the long term. Here is why you may want to focus on saving now:
- You don't want to miss out on market returns over the long term.
- Consider the benefits of tax-advantaged retirement accounts. These will offer tax benefits to you that can help make the most of your money.
- If your employer has a retirement savings program, and even better, an employer match system, it could add a nice little boost to your retirement savings.
Of course, when it comes to the market, there are no certainties. Past market performance does not indicate future results, and one thing that is for sure: The market, and thus your investments, are likely to fluctuate in value over time. Consider the state of your current financial situation. If you're in dire straits, it might be better to focus on reducing your debt. There are pros and cons to each approach and no one right answer. So it's important to consider how your particular financial situation fits into these scenarios. You might find a combination works best for your needs.