MANAGING DEBT WHILE SAVING FOR RETIREMENT
The stages we experience as we move through life can be thought of as seasons. The working-years can be analogous to summer when you are growing your savings and planning for the next season. This next season is the season of retirement. How long you spend in retirement can be determined by many factors. From your projected retirement age or the age you’re forced to retire to your health and family history, regardless, people are living longer. As such, it’s vitally important that you save enough so you don’t risk running out of money.
In this summer season of planning and projecting, how do you balance saving and debt? Do you have to choose between paying off debt verses saving for retirement? There are a couple of things to consider that can help you make the best decision for your unique situation. Debt is not necessarily a bad thing if you’re not carrying too much. For instance, some debt is required if one of your goals is building your credit history (ideally, you’d want to pay off your credit card balances monthly). It’s important to know that it’s absolutely possible to both pay off debt while saving for retirement. The strategy of “paying yourself first” each payday is a great way to start while tackling debt and saving for the future.
Debt can be stressful and nothing is more important than your peace of mind. If you’re carrying too much debt, then it will be necessary to focus your efforts on reducing that debt. If this is the situation you find yourself in, consider the following strategies. To begin with, start by creating a budget to better understand your current financial situation including your total debt. A goal should be to keep your debt-to-income ratio below 35% and your credit utilization below 30%.
As mentioned, not all debt is bad. In building a credit history, 35% of your credit score is payment history. This being the case, you will want your payment history to reflect good money management. If your debt-to-income ratio is above 35% then a priority should be to get that down to a more manageable level.
Strategies for paying off debt are not a one size fits all. Some may prefer the psychological advantage of the “debt snowball” whereby, your smallest debts are paid off first. This method can be very appealing with its instant gratification as your progress is immediately recognized and some of the money you begin to free up can be saved while some should be applied towards the next debt to be paid. Others may prefer to tackle their debt by paying off their higher interest balances first. This could be considered delayed gratification but may save more money in the long run. Whatever strategy you choose, stay with it and you’ll soon see progress. Getting and living out of debt is a mindset as much as it’s a strategy.
Another consideration could be the interest on your debt and possible tax incentives verses the expected rate of return on your investments. It’s always important to have this conversation with your tax professional for guidance as everyone’s situation is different.
Whatever you decide to do in preparing for your season of retirement, consider both the math and emotional aspects and consult a financial professional for guidance.