Most people find it hard to decide whether they should pay off their debts first or save for retirement. Well, it depends on your debts and recent savings. Getting rid of your debts will become essential if you are at the risk of bankruptcy or have other different loans. This is because you will need to handle this situation sooner or later, but your interest rate will increase with time. You cannot live a peaceful retirement life if you still have a list of debts.
On the other hand, retiring without a penny will not help you either. Of course, how would you afford your regular expenditures? So, having savings is also a crucial aspect. To make your decision easier, we have mentioned some factors you need to consider before choosing between debt and savings. Read the article to make the right decision.
When to Make Saving a Priority?
There are a couple of reasons to save your money first and then pay off your debts.
- You have debt with a lower interest rate.
- You don’t have emergency savings.
- You are enrolled in the employer 401 (K) program.
If you have debts or credit cards with a low-interest rate, you can easily make saving your priority. You can also pick saving over debts when you have access to any retirement savings program through your company. Not to mention, avoiding saving until you are free from debts can cost you a lot more. Start saving now to increase the value of your contributions in the future.
Finally, the last reason to save some money in your bank account is when you don't have an emergency fund. If you don't have any savings, eventually, you will pay for unexpected costs from your credit card. This simply increases your risk of covering with debts. So, if you fall into all these three categorize, you can easily choose the “saving money” route.
When to Make Debt Payment a Priority?
As we have already discussed, the right time to save is when you have the leverage to secure your money instead of paying off your debts. On the other hand, when you need to pay debts, your priority is completely opposite. You need to pay your debts when you have a high-interest rate on your credit cards. You can lower down the dollar amount of interest you pay every month by reducing your owed balance. This approach can help you more than any investment in the stock market or earnings through saving accounts.
On the other hand, fixed payment loans like a mortgage or student loan can be handled through extra payments. This way, you can trim down the period of your loan, as your lender can take this money for future payments. Moreover, you don’t need to worry about the tax deductions when you are paying both loans earlier. This is because the deduction will be the same amount you have to pay in the form of interest on your loan for a year.
Steps to Balance Both Strategies
Saving money and paying off your debts may look like completely different strategies, but if you look closer, they both help each other to some extent. This is why you can balance both by adhering to the following steps.
Focus on Your Expenditures
This step is critical, whether you want to secure funds or need to pay your debt. You need to focus on your cash flow. Check how much money you are receiving per month and how much you are using. Adjust your funds for paying off debt and retirement. Restrict yourself to use money only on necessary items.
Create a household budget spreadsheet to help you record your remaining money, used money, and debts. Not to mention, check the banks and credit card payments, and recent bills to get the exact amount of your spending. This will help you to see where the money is going and how you can control it.
You can also look for a side job that can help you earn some money. You can become a math tutor, join uber for a few months, or participate in a local art fair. If not, search for “side hustle ideas” and look for the work you can do.
Improve your Savings
You need to focus on long-term savings. Saving capital while you are paying off your debts can help you a lot. Moreover, you can also contribute to your retirement account. This will be great if your employee offers a matching contribution on a 403(b) or 401(b) program; try to put away a minimum. This way, you can get a good amount of money. You can say that this money is totally free to some extent, which means you get more than you have used.
Try Reductions in Debit Card
Most people become helpless when the interest on their debit cards starts increasing. You need to start as early as possible to make reductions in your debit card. Stick to this plan, and don't wait unless you get into a serious problem or have to pay debts. Do the following steps.
- Create a list of all your debts from the highest to lowest interest rate.
- Start paying your high-interest debts first. Try to pay more than your minimum payments.
- Make sure that you are at least paying a monthly minimum payment.
When you become debt-free, save the same amount of money you were paying on debt for your retirement.
Keep an Eye on Your Credit
How you can maintain good credit depends on your financial situation. People who have credit card balances often feel the temptation to use it all. Instead, they should keep the balance as it is and start to pay off credit cards.
Moreover, when you become debt-free, you can use your credit cards. But of course, only in the time of need. Furthermore, not using your credit cards at all can damage your credit score. This may cause a problem when you really need it. What you can do is: use a small amount of money and then pay the balance in full each month.
Now that you have understood the basic factors that play a role in your decisions, you can choose what is best for you. Whether you need to pay your debt, save some funds, or will do both at the same time?
Remember that ISU Credit Union has many competitive checking and savings options you can use to manage the money you earn. Check out our offerings!