Pay off Debt or Save for Retirement?

May 7, 2013

By: Barb Miller, Bankruptcy Specialist at LSS Financial Counseling

Wow … what a loaded question! We always hear how crucial it is to get rid of toxic debt, especially credit cards with double digit interest rates. Therefore, people generally assume that paying off debt rather than investing for retirement is the correct answer. In my opinion, this is not really an either/or proposition. The best approach? Do both!

One of my favorite financial gurus is Liz Weston, a regular blogger for the personal finance section of MSN’s Money website. She often tackles difficult topics, and makes them easy to understand.

Where you need to be:

Before getting into why it is important to both save for retirement and pay down debt, we have to start from a common point. To be able to move forward financially, it is essential that you are 1) using a budget to control your spending, and 2) have extra income for both debt repayment and your future retirement.

If you are spending more than you earn each month (or have no idea how much you spend), it is time to deal with the basics. This means learning to live within your means. The brutal truth is if you don’t control your spending, you will likely continue to abuse credit, and never have money tucked away for emergencies or retirement.

Saving for retirement:

Westin points out that retirement can be expensive and lengthy, especially since people are living longer these days. If your employer offers a retirement plan, and you don’t participate, you lose out in several ways.

  • A match from your employer: Most employers will match a percentage of the contribution you make each month. This is free retirement money for you! Over time, even a small match will add up and make a difference. So, talk with your HR Department to find out how your company retirement plan works, and how much you must contribute to get an employer match.
  • A reduction of taxable income: Your retirement contributions are withheld on a pre-tax basis. This means you pay less in income taxes overall because your taxable gross income will be less. If you feel you can’t squeeze out another dollar from your paycheck, talk with your payroll department to see what difference a small contribution to your retirement plan (2% - 4%) will make on your take home pay.
  • There is always hope: Don’t give up if you are now middle-aged and haven’t started a retirement fund, or you can’t afford to contribute $250 a month. There is no time like the present to begin retirement savings. Acting now can ensure you will have enough cash (or at least more cash) to live on when you retire. If you never get started, Westin points out the average Social Security check is around $1000 a month. Will you really be able to live on that?

Paying down debt:

  • The “debt snowball” method: Make a list of your debt balances and pay off the smallest debt first. You pay as much money on the smallest debt as you can but also make the minimum payments on the rest. When the first debt is paid, you use that payment plus the minimum to get rid of the next smallest debt. And so forth and so on. The idea is that the emotional boost from ticking off smaller debts will keep you motivated to pay off everything.
  • The “debt avalanche” method: This process is basically the same as the debt snowball method. But, rather than starting with your smallest debt, you tackle the debts in order of the highest interest rates. This method is superior in that you will pay less interest overall, but it may take longer to tick off each debt.
  • Consider credit counseling: If you are struggling with your debt, contact a certified financial counselor. Visit the NFCC to find one!  The counselor will review your overall financial picture and identify realistic options to address your debts. If money is tight, your counselor will likely have suggestions for how to reduce spending to make your budget work. 

 

About LSS Financial Counseling

At LSS Financial Counseling, we empower people to take control of their debt with tangible steps and personal guidance that are the key to confidence and success. We’re here to help you with your finances, not take over and ultimately show you that you’ve got what it takes to Conquer Your Debt.

Add comment

Security code
Refresh

Take the Pledge

I pledge to save money, reduce debt, and build wealth over time. I will encourage my family and friends to do the same

Take the America Saves Pledge

Blogger Resources

We are always looking for guest bloggers to share their savings tips and advice with our readers. 

Review Submission Guidelines

Tip of the Day

  • Written by Administrator2 | January 6, 2014

    First saving strategy: Pay off high-cost debt http://ow.ly/sj3vP

Saver Stories View all »

Getting Out of Debt

Written by Katie Bryan | October 28, 2013

In 2004, Tonya Shelton was facing financial ruin. Barely making more than minimum wage and having lost her home to an unexpected family crisis, Shelton and her family were forced to live in a rundown hotel.

Read more...

Jump-Starting a Financial Makeover

Written by Katie Bryan | October 28, 2013

Nichelle Johnson, a single mom with two teenage children, knows what it’s like to stretch a dollar. When she moved back to Virginia Beach in 2008, she provided for her family with just a part-time library position.

Read more...

Taking Steps Toward Financial Fitness

Written by Tammy Greynolds | November 7, 2014

Nicky Vasquez learned about Virginia Saves when she attended her first class with Bank On Virginia Beach. The instructor shared how important it was to have a written savings goal, and the entire class joined Virginia Saves as the first step toward financial fitness.

Read more...

Receive Updates

Sign up for Texts

Written by Tammy Greynolds | July 15, 2014

Sign Up

Sign up for Emails

Written by Super User | September 16, 2013

Get Emails

Take the Pledge

Written by Super User | September 16, 2013

Start Saving