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2 Things to Do Before Saving for Retirement – The Motley Fool

Lack of pension savings quickly becomes a crisis in this country. One in three Americans has less than $ 5,000 saved for retirement, and one in five has no savings at all, according to a Northwestern Mutual Survey.

If you are one of these groups, consider increasing your pension savings, but there are a few other things you really need to care for first.

1. Create an Emergency Fund

Nothing saves your finances as an emergency. If you have no savings, you may need to take out a loan or charge your credit card for which you cannot repay at the end of the month. When you fall into that debt cycle, it can be difficult to get out, and the money you could otherwise have saved must go against interest on your debt.

  Woman with envelope full of money.

Image Source: Getty Images.

You can avoid this by proactively saving for these unexpected events in an emergency fund. Open your own account or keep the money in your existing savings account. Just make sure you dive into the emergency saving.

You should have at least three months of life, at least six months are even better. If you want, you can save for pension and emergency fund at the same time. But give the edge to your emergency fund. Once you've met your goal, you can spend more of your extra money against retirement each month.

2. Pay High Interest Debt

There is a debate on whether it is best to pay off high interest debt before saving for retirement or whether you should do both at the same time. It's not a simple decision. The longer you take to pay off credit card debt, the more you pay in interest. It is a guaranteed loss, and depending on how much you owe and what your credit card interest rate is, it can amount to thousands of dollars. However, by delaying retirement savings to pay off debt, you miss months or years when the money could have grown, and when it's time to retire, you'll have less reason to show it. [19659002] The right way to deal with this dilemma depends on your situation. If your employer offers a 401 (k) match, you shouldn't skip this unless you absolutely can't afford to contribute to it. Contribute enough to take advantage of the free money and watch the rest against debt payment. Look for ways to reduce your debt, such as transferring a balance to a 0% APR card or consolidating your debt with a personal loan. This can help you get your debt under control faster.

If the employer does not offer 401 (k) or does not match your contributions, it is a bit more difficult. If you only have a small amount of high-interest debt, you may be better off throwing all your extra money on it for a month or two to knock it out. Then you can use all the money to save after your debts are paid.

But if you have a lot of high interest debt, consider paying it down and saving for retirement at the same time. You can split your money evenly between the two or favor any higher priority for you.

You may need to make some lifestyle changes to free up extra money, such as traveling and eating out less or picking up a sidestream. If you are struggling to find a plan that works for you, consider consulting a financial advisor who can give you personal advice. They might come up with a plan you hadn't thought of.

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