This is a guest article by Carly Lance. If you are interested in contributing to Debt RoundUp, please follow our guidelines.
It’s the age-old question: Are you better off eliminating your debt or saving up for your future? Ah, if only there was a simple answer! Unfortunately, there’s no obvious choice between the two. However, you can decide which is better for you and come up with financial goals to further your fiscal future.
Why Not Just Pay Off Debt?
If you’re facing super-high interest rates, it’s only logical that you should knock that out before worrying about your savings. After all, you might earn a bit of interest in a savings account, but your debt could be racking up crazy interest every month you don’t pay it off in full.
However, simply focusing on paying off your debt leaves you unprepared to face an emergency. If you’re unable to work or just need to have some cash on hand for an emergency situation, you could be in big trouble without a savings safety net. Without some money saved up, you’ll only have credit cards, putting you further in debt. See the problem?
Why Not Just Save for Retirement?
Your credit cards come with minimum payments for a reason, and the rest of your cash should go into your savings, right? Wrong! Paying only the minimum balance and chucking the rest into savings can seem like a good idea, especially if you’re approaching retirement, but if you’re not careful, you’ll retire with debts.
Sticking with the minimum payment amount on your debts means you’re throwing away money at interest. You’ll never see that cash again. Here’s a fun factoid: Banks want you to pay interest. That’s where they make their money. By paying simply the minimum payment, you’ll wind up paying far more in interest than if you paid just a little extra each month.
Find Your Balance
Debt, much like juggling, is all about balance and manipulation. You’ll need to manipulate your finances to find the right combination of debt repayment and savings. What you do with your cash depends on what your debts are, how old you are and what your retirement savings goals are.
Remember, for most retirement accounts, you can only withdraw about 4% each year after retirement safely. If you go above that, you risk running out of money. That means that a retirement savings of $1 million only gives you about $40,000 a year to work with once you’ve retired. If you retire with debts, you’ll have to repay them from your hard-earned retirement fund.
The easiest and best route for most people is to balance between paying off debts with high interest rates and saving a moderate amount each month. Figure out your debt with the highest interest rate. Put as much money as you can toward that debt until it’s gone. Then, pick your next-highest interest rate and pay that off. Rinse and repeat until you’re debt free. While you’re doing that, make sure you’ve a) built up a short term emergency savings and b) contributed to your retirement account. Remember, even if you can only afford to set aside a little bit of money each month, that’s still better than nothing.
It’s also important to stop accumulating debt at some point. For many people, debt comes as a result of emergency spending. If you don’t have a short-term, easily accessible backup savings account, you’ll have no choice but to put any emergency expenditures on a credit card. This puts you further in the hole and can make it harder to dig back out.
If you’re serious about retiring with a decent chunk of change without debt, you need to focus on both sides of the equation. Come up with a financial plan, perhaps with the help of an adviser, and stick with it. It may seem challenging, but when you’re enjoying a debt-free retirement, you’ll be glad you did.
Carly Lance loves to blog about personal finances whenever she can. She also is employed as the blog and marketing manager at Personal Bankruptcy Canada, a company that deals with people going through bankruptcy in Canada.