Pay down debt or save for retirement?
Many of my clients have a lot of competing priorities, and the most common one is whether to pay down debt, or save for retirement. It’s probably a question we have all asked ourselves at one time or another. While there’s no one-size-fits-all answer, there are certainly some pros and cons to both options that you should consider.
Deciding how to deal with competing priorities requires an evaluation of your specific circumstances, as well as your financial goals. In any case, let’s take a look at some advantages and disadvantages of these two big options.
Advantages of Paying Down Debt
- You learn to live on a budget – For some people, this may sound like a negative. However, budgeting is a learned skill that is vitally important. Making higher payments on credit cards, mortgages, or other loans will invariably require you to cut back in other areas. This, in turn, will necessitate a strict budget that is aggressive, without being unrealistic. Once your debt has been paid off, these new skills will carry over into other areas, like investing and saving for retirement.
- You can save a lot of money on interest – Interest rates on loans tend to be much higher than those on savings accounts, so paying down your debt first can actually save you more money in the long-term. The faster you pay down your debt, the less you will pay in interest.
- It takes a huge weight off your shoulders – It goes without saying that having debt is stressful. From a credit card that you struggle to pay down to an auto loan with high monthly payments, debt can really make you worry about your financial footing. Paying off all of your debt is one of the most satisfying and worthwhile things you can do for your future.
Disadvantages of Paying Down Debt
- It takes away from your cash flow – Paying down debt will help you learn to live on a budget, but it will also require you to dedicate a large portion of your cash flow to loan payments. This, in turn, will require you to live very frugally for a few years.
- You may struggle during an emergency – It is always smart to put aside savings for an emergency, but if you are focusing your attention on debt payments, you won’t have much left to save. If an emergency situation does occur, you may not have the necessary funds to cover the additional expenses.
Advantages of Saving for Retirement
- It’s very easy with a 401k – Assuming your employer offers it, a 401k plan is one of the easiest ways to save for your retirement. A 401K allows employees to set aside a portion of their paycheck before taxes are taken out. This way your savings are invested and have the potential to accrue greater earnings over time. Additionally, your employer may match your savings, which is essentially free money for you, with the added bonus that your taxes will either be lower or delayed for many years.
- If you start early, you will see a lot of growth – Most people know that you should start saving as soon as possible, but it is often difficult to understand the importance of savings when you are still in your 20’s. However, if you start setting aside money during this time, your savings will see a lot of growth by the time you’re ready to retire.
- Saving gives you peace of mind for your future – While the future is never certain, having a healthy savings plan can help stave off the uncertainty of retirement. Many people worry that they will not have enough to cover their expenses once they are too old to work, but making a savings plan (and sticking to it) can help eliminate this fear.
Disadvantages of Saving for Retirement
- It diverts funds away from your current expenses – If you live paycheck-to-paycheck, setting aside money for retirement might feel like a luxury you simply cannot afford. Thankfully, there are ways to save for almost any budget. You may need to cut back on non-essentials or change your current lifestyle.
- Saving is a slow process in the beginning – When you first start saving, you will not see very much growth. This often causes many people to take their money out of savings, but this is a huge mistake. You will need to power through the early years to see how your money can accumulate.
So Which Is Better: Paying Down Debt or Saving for Retirement?
Honestly, why not do both? If you have a retirement plan through your employer, try to contribute as much as you can – at least enough to get the company match. You won’t miss this money since it comes out of your paycheck first and never makes it into your checking account.
This will allow you to focus your remaining funds on paying down your loans. Your minimum payments should already be part of your budget and, whenever possible, you should budget for more than the minimum. If your regular take-home pay is not enough, then you know you need to make some spending decisions.
Should you really want to speed up the process, consider getting a side-gig or working freelance in your spare time. If you do whatever it takes to pay your debts quickly and save for retirement, your future self will thank you. Remember: no one gets in debt overnight, so you don’t get out of it overnight either.
Are you looking for personalized advice to improve your finances? Jumpstart your savings and debt management strategy today with Pathfinder Planning!
Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.
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