Should I Pay Down Debt or Save for Retirement?
Much like cardio and strength training are both important for a healthy body, debt reduction and saving for retirement are both essential for your financial health.
Similar to a good workout plan, it is important to have a strategy in place on how you are going to meet your financial goals. There is no “one size fits all” approach, but there are some things to consider that will assist you in determining where the best place is to put your extra cash. Below are a handful of steps you can take to evaluate whether you should be paying down your debt, saving for retirement or both.
First, make a list of your assets and debts. This personal financial statement form can help. I know, it’s painful, kind of like stepping on the scale, but it’s very important to assess your starting point.
Now that we know our starting point, it’s time for the workout. Complete your financial exercises in this order:
- Am I late on any payments? Being current on any bills is important and the first priority.
- Do I have an emergency fund? Most experts recommend your emergency fund include at least three months’ worth of cash to cover your normal monthly bills.
- What is the interest rate on my debt versus what I am earning on retirement assets? In general, if you have high interest-rate debt that is not tax deductible, you should pay it off before saving.
- If I only pay the minimum payment, when will the debt be paid off? Will this debt be paid off by the time I retire? If not, do I need to focus more cash towards this debt sooner?
- Is the interest tax deductible? Speak with your CPA to determine whether the interest you’re paying on your debts can be deducted from your taxes. When interest is tax deductible, sometimes it makes sense to only make the minimum payment.
- Does my employer offer a retirement plan contribution match? If yes, am I contributing the maximum amount to receive the match (that’s free money!)?
- Do I have funds left over? When there is money remaining, you have several options to consider, such as:
- Putting funds into a Traditional or Roth retirement account
- Saving for a child’s education
- Increasing your non retirement savings
- Charitable giving
A lot can happen in a year, so I recommend repeating this financial workout at least annually to make sure you are on track to reach your financial goals. After all, you wouldn’t follow your original workout once you’ve met your first strength or weight loss goal. You adjust little bits to start improving other muscle groups. Remember, financial fitness is like a marathon, not a sprint.
No matter what point of this process you’re at, Bankers Trust is here to assist. We know every situation is different and we can assist you in assessing your financial picture.
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