Throughout our lives we are constantly striving to find balance. Financially, most of us found ourselves teetering between growing our assets and managing debt. And with time on our side, it may have been easy to save any debt worries for a later day.
However, as you approach your golden years with debt, while still building your nest egg, you may begin to ask yourself which is more important – paying off debt or saving for retirement? Although the answer is not as simple as yes or no, deciding which decision is best for you will depend on four primary factors.
Emergency Fund – Regardless of how much you have saved for retirement or racked up on those credit cards, it is critical to have an established emergency fund. Over one-third of Americans are unable to cover a $400 unforeseen expense. Not having a sufficient emergency funds of at least six months of expenses and then experiencing an unexpected bill can derail your entire financial plan.
Employer Match – If you are fortunate enough to have a retirement plan offering an employer match, take advantage of it. Even the highest credit card interest rates of 23% cannot beat a dollar-for-dollar match inside a retirement account. Additionally, retirement plans provide many tax benefits and afford some (not absolute) protection from creditors in the event you run into financial trouble.
Interest Rates – After your emergency savings has been funded and you’re contributing up to the maximum match of your retirement account, now it is time to tackle those debts. Review your account statements and begin paying off debts with the highest interest rates. This will be the fastest way to reduce your debt load. When it comes to your mortgage, speak with your accountant as there are advantages and disadvantages to paying homes off early.
Budget Properly – You will want to create two budgets. One budget for the present and a second, estimated budget for retirement. The former will help determine how much extra money you have available to aggressively save for retirement and pay off those debts. Your estimated retirement budget will help you visualize what your financial needs will be in the future.
Dreaming of your days in retirement can fill you with excitement or despair depending on your current financial picture. Putting off what you can do today will only make any changes in your financial situation that much more difficult, so don’t delay!
If you are seeking guidance on how to plan for your financial future, contact my office today to schedule a no obligation appointment. Together we can put you on your desired path.