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Business

What should you do first? – The Motley Fool




Making smart financial decisions can often seem like a catch-22. You know you're saving for retirement, but it's hard to save when you're burdened with debt. But put limited money against debt and you miss valuable time to save for retirement.

Storage for retirement and debt repayment are both important economic priorities, but there is no decent answer to which one is more important. As with most financial decisions, it depends on the situation.

Sometimes it is best to pay off the more expensive types of debt first, because you can pay more of interest than you earn from your investments. At other times, it is smarter to spend more on retirement and continue to make minimum payments on debt, even if it takes longer to pay. The solution that's right for you will depend on several factors, so it's important to look at the big picture to find out which option will have the best long-term results.

  Woman with Multiple Credit Cards

Image Source: Getty Images

When Prioritizing Debt Over Storage

Not all debt is created equal and some types are more harmful than others. High-interest debt, like credit card debt, can be incredibly toxic. Even if you consistently make minimum payments, because interest rates are so high, your balance can only grow for a longer period of time to pay off your debt. Even relatively small balances can take years to pay off (not to mention hundreds or thousands of dollars in interest payments), and taking the time to pay for this type of debt can sometimes do more harm than good.

For example, if you have thousands of dollars in credit card debt and you pay an interest rate of 18%, putting money into a pension account that earns a 7% return, may not be as beneficial as it seems. If you pay more in interest than you earn from the savings, you will not come out financially in the future.

Having said that, if you have a 401 (k) offering employer matching contributions, it is a good idea to contribute enough to the Pension Fund to earn the full fight, no matter how much debt you have. The matching contributions are essentially free money and can potentially double your savings, so take advantage of them.

Focusing on your higher interest rate debt is also smart if your pension fund is relatively healthy. While it's never a bad idea to save consistently, if you have a strong nest egg, you may be able to afford to pause to save just enough to pay off high-interest debt.

When Prioritizing Saving Over Debt

The lower interest rate type of debt like a mortgage or student loan is not as harmful or expensive, so paying it out as soon as possible is not so important. Even if you still need to make the minimum payments on all your debts, save the rest of the money for retirement.

Save for retirement before, rather than later, has an important advantage: Your savings grow much faster when you start early, thanks to compound interest rates. For example, say you have a goal of saving $ 500,000 for 65 years. If you start saving for 25 years, you need to save just over $ 200 per month to reach that goal, provided you see a 7% annual rate of return on your investment. But if you were to wait for 35 years to start saving, you would have to save around $ 450 a month to reach the same goal.

By taking a time-out to focus on debt, you miss your most valuable resource: time. If you focus on paying less expensive debt before saving for retirement, it will only be harder to raise your savings down the road.

Retirement storage should typically be your primary financial goal, unless you are saddled with thousands of dollars in high interest debt that racking up your interest daily. If so, pay the most expensive debt as soon as you can, and use the rest of your retirement savings.

Balancing of pensions and debt

Ideally, you should aim to save on retirement and cope with your debt at the same time. It may take a little longer to pay off your debt if you spend some of your retirement savings, but it will also be easier to establish a strong pension fund if you save consistently.

If you are struggling with high interest credit card debt, one way to ease the burden is to utilize balance transfer cards. The best balance transfer cards allow you to switch your credit card balance to a new card with a 0% introductory period for up to 21 months. In other words, you can convert your existing debt into interest-free debt over a certain period of time. This gives you the opportunity to quickly widen your debt and potentially save thousands of dollars in interest.

At the same time, try to sit away at least a little for retirement. Saving even less each month is better than nothing, and if you can benefit from the employer matching the 401 (k) contribution, you'll be in even better shape.

Money management can be challenging sometimes, especially when you have competing financial priorities with just so much money going around. Being strategic about which priority you tackle first, you can potentially save money and set yourself up for long-term financial success.



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