It is hard to decide whether you should prioritize paying down your debts or saving for your retirement. Many try to do both at the same time, but it could be more beneficial in the end to pick one to focus on. If you have extra money at the end of the month, which should you choose? Keep reading to see which you should choose for your financial plan.
If you are able to pay off debt and fund your retirement plan, it is in your best interest to do both! It is very important to get ahead on your retirement savings so it can build over time.
Most people say you should focus on saving for your retirement, especially while you are younger. Compound interest is the key to retirement savings so it is extremely important to start saving early so your money can grow as much as possible. Unfortunately, many young adults are plagued with student loan debt so it is difficult to contribute to retirement savings.
For people with large amounts of high interest debt, such as credit cards, student loans, and car loans, they should prioritize paying these off. With high interest, you can end up owing more money in the long run if you do not pay it down quickly.
No matter how much debt you owe, you should still contribute to your retirement savings. Any contribution is a good contribution! If your employer offers 401k matching, you need to take advantage of it. You should contribute a percentage of your income that will provide the max employer match for your 401k.
If you are drowning in debt, you need to prioritize paying down your debts to stabilize yourself financially. Substantial debt can take a major toll on your mental health. Once you are in a better place with your debt, you can begin to prioritize your retirement savings.
To start paying off your debt, look at how much money you have left after necessary expenses per month, all of your periodic expenses, and see what costs you can cut. Once you know how much you have left each month, you can create a budget to allot your remaining money to debt repayment.
If all of your debt has low interest rates and you do not have an emergency savings account, prioritize saving money. After you have an emergency fund established of 3-6 months worth of expenses, you can start to majorly contribute to your retirement accounts. If you have access to employer 401k matching, take advantage of it! You will also want to max out your contributions to your 401k and IRA accounts to deduct it on your tax returns.
Overall, whether you should save for retirement or pay down your debt depends on your own individual financial standing. Do your best to manage both to the best of your financial abilities.