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Paying off debt vs. retirement savings: What should you tackle first?

Paying off debt vs. retirement savings: What should you tackle first?

November 18, 2019

Should you pay off your high-interest credit card and then start saving, or save money then deal with the card? It’s a common financial quandary we see a lot of folks get wrapped up in. Some experts will argue it’s more financially savvy to pay off debt rather than adding to your emergency fund or allocating excess funds into your 401k. 

Making your money work for you

While everyone would like to enter into retirement debt-free, focusing on debt repayment now could mean you have to sacrifice building up your retirement savings. Personal finance decisions are seldom simple and ultimately boils down to your unique financial situation. So how do you choose the best place to spend your money?

When to put debt payment first 

We recommend paying down your outstanding debts before saving if you have credit cards with high interest rates. By reducing your owed balance, you'll also lower the interest you pay each month on the card. If owe on a student loan or a mortgage, extra payments can reduce the duration of your loan because your lender will disburse the excess amount to future payments. 

When to save first 

While it may not be your natural inclination, you may find yourself in a  situation where it makes sense to pay into your savings first and then work on your debt. For example, if you have debt with a low interest rate, you can put your extra money into savings first until you've fulfilled your emergency financial fund. 

Create a “rainy day” fund

Your “rainy day” fund should cover three to six months of expenses. Start by building a small $1,000 emergency fund. This money can cover small but urgent expenses like car repairs that would otherwise be charged to your credit card. Once that initial fund is established, a great rule of thumb is to continue contributing to that account until you’ve built up enough funds to cover three to six months of expenses. After your emergency nest egg is established you can shift focus on repaying any outstanding debt.

Connect with the experts at Confidere Financial to create a financial savings strategy that will put you on track to a debt-free and comfortable retirement.