We all want to reach a point where we dont have to work for a living.
Wed like to relax and enjoy life without any financial stress.
Of course, that wont happen if you dont save for retirement.
But how can you save if youre in debt?
There are a few things to consider when youre trying to balance saving for retirement with paying off debt.
Weve askedhow you juggle saving and paying off debtbefore.
Its a complicated question that depends on a variety of factors.
Heres what you should consider.
So build up a small amount of savings while making your minimum debt payments.
At first, I tried going without an emergency fund altogether.
That didnt go over so well.
So I compromised and saved $1,000 for an emergency.
So I had options for every scenario.
Over at Bankrate, personal finance author Paula Langguthsuggests systematically saving and paying off debtby creating milestones.
At $2,000, increase your payments more, reduce your savings amount even more, and so on.
After all, this is free money.
Thatsa guaranteed 50% return.
You dont get this anywhere else, so dont pass it up.
Just remember: an emergency fund is meant to protect you.
You could take the money out of your 401(k), but then youll pay a penalty.
Its best to have a small money cushion in place.
But what if you cant afford to make the match?
Sometimes you dont have to turn the faucet off you just have to lower it to a trickle.
If you might do this while prioritizing paying off debt, youll come out ahead in the end.
In short, take advantage of it as much as you might.
Thats another mistake I made when paying off debt.
How Close Are You to Retirement?
If youre getting close to retirement age, saving is going to be more of a priority.
hybrid approach
is to split the difference: Pay off some of the debt and invest some.
Most people automatically lean toward the mathematical answer, which makes the most sense on paper.
But personal finance has a lot to do with mindset, so Sethi suggests the hybrid approach.
It might especially be the best compromise if youre nearing retirement age.
If youre playing catch-up, you might need to contribute as much as you could.
You still want to head into retirement as debt-free as possible, though.
So whichever approach you choose, getting rid of your high-interest debt should still be a priority.
What Kind of Debt Do You Have?
Add up all of your debt and take a look at your interest rates.
Forbes contributorLaura Shin suggests:
Write these down in a spreadsheet from highest interest rate to lowest interest rate.
Include everything from credit cards to car loans to your mortgage to student loans.
Make your scheduled monthly debt payments, but then use your extra income for savings.
And then theres your mortgage.
Itstempting to pay off your mortgage early, but most experts recommend focusing on saving for retirement first.
So, if youre dealing with a debt below that, you might consider focusing on retirement.
Do the math, and double-check youre not paying more in interest than you could earning a return.
What Does Your Credit Look Like?
You might also want to focus on debt if youre trying to boost your credit score.
Credit utilization makes up 30% of your FICO score.
Its basically the amount of credit youre using compared to the amount you have available to use.
The lower your debt-to-credit ratio, the better your score.
Overall, it comes down to the numbers.
Once you do, come up with a plan.
Subtract #2 from #1.
Decide how much to allocate to each goal.
If you have high-interest debt, youll probably want to allocate 100% for now.
For all other debt, adjust your percentage based on the above factors.
Both getting out of debt and saving for retirement are important financial milestones.
Tackling them both simultaneously can be a difficult balancing act.
