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Pay off Debt or Save for Retirement?

Should you use your money to pay down debt now, or put it away for retirement and spend it later on. 


Financial Freedom, where do you start?


Simple answer: You should be doing Both.


The longer you take to pay off debt, the more you’ll pay in interest over time. And the longer you hold off on saving for retirement, the less you’ll have to live off of in your golden years.

An average human works about 34 hours a week, spends five to six hours on screens per day, and has Debt. The Debt could be in some shape or form, like student loans, home mortgage, carrying credit card balance or just any debt that has been accumulating for years.


New to start saving? You are not alone, many of us have been in this path. he next step is to find a way work your way up.


** General rule of thumb suggests that you should aim to save about 12%–15% of your annual salary each year as early as possible.


Where do I begin?


Debt can feel all-consuming if you don’t have a plan of attack in place—that starts with a budget and a debt repayment strategy. 


If you’ve got debt, your priority right now is paying it all off soon.


"The real challenge is managing competing financial obligations"

Start by taking stock of your debt balances, interest rates, and minimum payments. This will show you how soon you can expect to be debt-free and how much of your monthly income is going toward your debt. It’ll also tell you how much you’ll pay in interest over the life of your loan. 


Once you’re out of debt and have your fully-funded emergency fund, you’re ready to start building wealth for retirement. Try to stay away from the 6% minimum that is recommended, contribute more by investing 15% of your gross household income into retirement accounts.


If your employer offers a match, that frees up room in your budget to allocate more toward your debt repayment. 


How much do I need to save to retire? 


Most retirees that have had a financial plan, have fewer expenses in their retirement years. Depending on the lifestyle you choose, leave room for new expenses. You should make it a goal to save an amount equal to your current income. 


Let’s consider a scenario.

Assume this is your current state and you plan to retire at age of 67.

  • Current retirement savings balance: $20,000

  • After taxes, Desired annual income during each year of retirement: $65,000

  • Annual Social Security benefit: $21,379.56 (assuming average social security benefit is $1,781.63)


Take a Step approach.


A few things to consider:

1: Start by saving an amount for your starter emergency fund

2: Pay off most of your debt, except the house, using the debt snowball

3: Keep a fully funded emergency fund of 3–6 months worth of expenses

4: Invest 15% of your household income in retirement. There are several ways, start exploring

5: Have Children or plan to have one. Save for your children’s college fund

6: Pay off your home early. Pay slightly more towards principal every quarter, if possible every month.

7: Build wealth and share


"Wherever your investments are, document them." Have a Will and Living Trust

Mix it up


You may lose out on potential earnings if you use retirement savings to pay off debt. You don’t have to be debt free to save more for retirement though. It depends on your individual priorities and goals. 


Retirement brings some changes to how you live by giving you more free time. But a lot of the basics remain the same, and that includes how you pay off debt. 


How to prioritize your debt payoff

  • Debt with high or variable interest rates, such as credit cards, medical debt, home equity loans

  • Debt you’ve co-signed, such as student loans (the borrower is responsible for the debt if you die)3

  • Debt with low interest rates such as some car loans

  • Mortgage debt with fixed interest rates


Finish strong

Your income is your greatest wealth-building tool. When any part of it goes toward paying off the debt, it can’t go toward the future, let it be emergency savings or retirement. 


Let's say you are paying additional $500 a month towards paying off for next 24 months. Once the debt is paid off or after 24 months that $500 can start going towards retirement.


Your money is a tool for you to balance those tradeoffs and achieve your goals. 

Paying down debt to free up more of your income now, and saving for retirement so that you can live comfortably later are important goals to keep at top of mind, but prioritizing both goals could feel like you’re working against yourself


To plan for your future, it’s helpful to know where you stand financially. If you’re overwhelmed, ask for help. Ask us, how you can contribute towards your retirement, towards securing your financial freedom.

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