4 Steps for Paying Down Debt While Saving for Retirement
6/14/2023 12:00:00 PM
Contrary to what some may believe, it's possible and important to do both - plan for retirement and pay down debt! Planning a strategy to get out of debt can help you gain control of your finances. Stick to that strategy and you will be able to feel in control of your financial situation. It'll also help you feel more empowered about your financial future.
Here are 4 steps for paying down debt while also saving for retirement.
1. Review your budget to figure out where you have some flexibility.
Identify must pay expenses first - bills, groceries, rent. From what’s left over, prioritize your funds toward both saving and paying down additional debt. Make sure you take out money for saving and paying down debt before spending on other things. If you wait to see what’s left at the end of the month, chances are you won’t have much, if anything!
Take advantage of tools that help you with budgeting such as our monthly budget worksheet.
2. Take full advantage of employee-sponsored retirement plans.
In saving for retirement, save the amount your employer matches into a retirement plan. In doing so, you aren’t leaving any “free” money on the table. If your employer matches up to 3%, put a minimum of 3% towards your employee-sponsored retirement plan.
If you don’t have an employer-sponsored retirement plan, you can still contribute to an individual retirement account (IRA).
3. Pay off debt with the snowball or avalanche method.
There are 2 common strategies for paying down debt: debt snowball and debt avalanche.
With both options, you pay the minimum balance on all but 1 debt and pay as much as possible until it’s paid off. Once paid off, you add the amount you originally paid on that 1 debt onto your next debt until that one is paid off. Repeat the process until all debts are paid.
- Debt Snowball: Made popular by financial author and radio host Dave Ramsey, the debt snowball involves paying off the debt with the smallest balance first to motivate you to continue tackling your debt.
- Debt Avalanche: The debt avalanche involves paying the debt with the highest interest rate first to save you the most money on interest over time.
Which debt payment strategy is the best?
Both the debt snowball and debt avalanche will help you pay down debt, so the best strategy really depends on what will motivate you to continue. If receiving fewer bills will help you stick with your debt pay off plan, then opt for the debt snowball. If you’re more motivated by paying as little on interest as possible, then the debt avalanche might be your best bet.
4. It's important to always stick to your budget.
If you get a bonus, raise or any other “extra” income, instead of adding it into your budget and spending it, use some of the money to give your retirement savings a boost, and use the rest to pay off your debts faster.
Remember, while paying down debt is important, so are steps that build resources for future retirement income. If you focus only on debt repayment, you risk starting investing too late and don’t give yourself time to build your retirement assets.
Even small, regular contributions to a retirement savings plan can make a big difference over time. As the following chart shows, when you’re young, time is on your side, and the money you save has many years to grow and accumulate earnings. The longer you wait to save for retirement, the more you will need to “catch up” later to get to where you need to be.