When you’re looking at the question of what comes first retirement or paying off debt, the answer is paying off debt. But everything really starts with a good self-inventory of your income and expenses and setting up a budget so you can start telling your money where to go instead of wondering where it all went. If you have never made a budget I can send you a free worksheet that outlines the different categories and roughly how much of your income should be going to each. After you have your budget in place your next step is to set up an emergency fund minimum of $500 to $1000. Having an emergency fund can take the pressure off of life’s curve balls when they happen and it helps you stay on track with your budget. Then you should start paying down your debt, start with the smallest bills first, once one is paid off add that payment to the next smallest bill. It’s like a snowball rolling downhill gaining momentum tackling bill after bill with more force. Your next step is to build your emergency fund up so that it could cover 3 to 6 months of your expenses in case of job loss or medical illness. Once that’s in place then you can look at retirement planning.
If you have any questions please feel free to call me.
That is a great question! There are a couple schools of thought here, both with merit. One school will tell you to pay off debt first, and then contribute the amount that would have been paid to interest and loans to your retirement fund. The other will tell you to start funding your retirement early, so as to best utilize the power of time and compounding interest.
I recommend a hybrid approach. If you have the opportunity to fund a workplace 401k with employer match, then contribute as much as you can to receive the employer match. It makes no sense to pass on that free money, and longer time at compounded interest will grow a fund faster than shorter time and larger contributions. If that isn't an option, then open a Roth account, and fund it with automatic deposits of whatever amount you can afford.
At the same time, working off a detailed budget, we work at reducing the debt, and creating an emergency savings. The 'snowball' payment method is one that I've found to be effective in creating excitement and motivation in reducing debt. I've found that with most clients finding the money to be able to work on those goals simultaneously isn't hard to do, once we've scoured their spending habits and expenses. Having automated deposits to pay your savings and Roth are also big key steps - what you don't see, you don't miss!
I'm certain that you will get several differing opinions and answers to your question, so I'd ask that you really think them over, and work with the answer that feels best to you. Find an adviser that can help you get where you need to be. Thanks for asking!
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
Debt comes in various colors. The interest on mortgage debt is a deductible item on your income taxes. Other forms of debt are not deductible. The interest rate charged on some debt is negligible while the cost of other debt can be onerous. Credit card debt comes to mind when I think of high interest rates.
While I appreciate the thoughts about retiring debt before starting a retirement program, I think it would be wise to discuss this with a tax expert. Taxation can play a vital role in this decision because the contributions to a retirement program receive favored tax treatment, where plain ordinary debt doesn’t.
It seems to me that the key question is the extent to which the debt is exerting pressure on the family. If it is a small amount and being retired in a systematic manner, I think that starting a retirement program at the same time makes good sense. Don’t forget that what a retirement program needs is time. Shifting capital into retirement early can be quite helpful.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
Should you save for retirement or pay off debt? My answer is BOTH. While paying off debt is important, waiting till your debt free may not be something you ever get to. It is important to get into the habit of setting aside some money for retirement. Time is the best investment return a person can have. If you have time, you can contribute less and let it work. Waiting till all debt is retired leaves you with a situation where you have to throw extra money into the plan to compensate for loss of time. For a lot of people, waiting to start is just a bad idea. Do both with what you have.
Financial Advisor, Watermark Asset Management, San Ramon CA
There is not an easy answer to this question as there are varying degrees of debt. It can become a math problem in determining the shortest distance between retiring debt while also accumulating savings for retirement.
Generally speaking it is best to reduce the "bad" debt which is not tax-deductible and accruing high interest rates. You figure a credit card at 18% interest is going to yield an immediate 18% return on your investment by paying it off. However I would think twice before paying off a zero % car loan and instead use the bank's money to fund your Roth IRA. Also, if you stop contributing to a 401(k) plan you may be leaving "free money" on the table by neglecting the employer match if there is one.
Overall, if you have an overwhelming amount of debt, it is best to tackle that first, but once it becomes manageable, to fire up the retirement savings, especially in a 401(k) with an employer match.
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If you have any questions please feel free to call me.
I recommend a hybrid approach. If you have the opportunity to fund a workplace 401k with employer match, then contribute as much as you can to receive the employer match. It makes no sense to pass on that free money, and longer time at compounded interest will grow a fund faster than shorter time and larger contributions. If that isn't an option, then open a Roth account, and fund it with automatic deposits of whatever amount you can afford.
At the same time, working off a detailed budget, we work at reducing the debt, and creating an emergency savings. The 'snowball' payment method is one that I've found to be effective in creating excitement and motivation in reducing debt. I've found that with most clients finding the money to be able to work on those goals simultaneously isn't hard to do, once we've scoured their spending habits and expenses. Having automated deposits to pay your savings and Roth are also big key steps - what you don't see, you don't miss!
I'm certain that you will get several differing opinions and answers to your question, so I'd ask that you really think them over, and work with the answer that feels best to you. Find an adviser that can help you get where you need to be. Thanks for asking!
While I appreciate the thoughts about retiring debt before starting a retirement program, I think it would be wise to discuss this with a tax expert. Taxation can play a vital role in this decision because the contributions to a retirement program receive favored tax treatment, where plain ordinary debt doesn’t.
It seems to me that the key question is the extent to which the debt is exerting pressure on the family. If it is a small amount and being retired in a systematic manner, I think that starting a retirement program at the same time makes good sense. Don’t forget that what a retirement program needs is time. Shifting capital into retirement early can be quite helpful.
Generally speaking it is best to reduce the "bad" debt which is not tax-deductible and accruing high interest rates. You figure a credit card at 18% interest is going to yield an immediate 18% return on your investment by paying it off. However I would think twice before paying off a zero % car loan and instead use the bank's money to fund your Roth IRA. Also, if you stop contributing to a 401(k) plan you may be leaving "free money" on the table by neglecting the employer match if there is one.
Overall, if you have an overwhelming amount of debt, it is best to tackle that first, but once it becomes manageable, to fire up the retirement savings, especially in a 401(k) with an employer match.