One of the biggest challenges in making smart money decisions is that many important goals compete for our limited dollars. This is exactly the case for people who want to save for their retirement but also get out of debt.
There’s no such thing as time – and plenty of time – to turn your retirement savings into a much bigger pot of gold, thanks to the cumulative returns on investment. This means that delaying saving for retirement is a bad idea.
But let the debt rack up costly interest charges while you send precious dollars to your retirement account? It doesn’t make much sense either.
Everyone’s situation is unique, but many experts suggest starting retirement and then focusing most of your money on high interest debt. Here is the process step by step:
Start saving for retirement
Pay off high-rate “toxic” debt
Stay on track with a written plan
1. Saving for retirement comes first
If your employer offers an equivalent contribution to a 401 (k) or other retirement savings plan, contribute as much as you need to get that free money.
Suppose your employer offers â100% up to 2% of salaryâ. This means that your employer will add a dollar for every dollar you contribute, up to 2% of your salary. So if you earn $ 60,000 and contribute 2%, your employer will add $ 1,200 per year on top of your $ 1,200 contribution.
âYou double your money even before the ROI or tax savings,â says Joe Heider, founder of Cirrus Wealth Management in Cleveland. Even a 50% match is still a large amount of free money that you don’t want to pass up – you won’t get a 50% rate of return anywhere else.
If you don’t have a retirement plan at work, open a Traditional IRA or Roth IRA (if you’re not sure what’s best for you, read our guide). There’s no matching you can take advantage of, but you can set up recurring transfers from your bank account to mimic the ease of automated workplace contribution. here is our roundup of the best IRA account providers.
per year (approximately)
2. Pay off high-rate debt
If you have credit card debt, payday loans, or debt that has variable or high interest rates – anything above about 9% – then tackle it. (If this toxic debt is more than half of your income, consider looking debt relief.)
For a psychological boost along the way, it can be helpful to use the debt snowball method, where you focus the repayment efforts on your smallest debt first – always making the payments. minimums over the others, of course. Once that’s paid off, focus on the next debt, and so on. Read how to use a debt snowball.
âIt helps to win early on,â says Jessie Doll, Wealth Management Advisor at TIAA in Fairfax, Va. âNow I have some confidence in myself to do some of the other long term things that need to be done. “
3. Open an emergency savings account
It’s okay to start small. Get $ 500 aside in a savings account. This will prevent you from accumulating credit card debt for every unforeseen expense.
You can build from there. Even having “at least a few months of spending saved is good planning,” Heider says. âYou lose your job, you get laid off, you get sick – it gives you a bit of comfort when you need it most. “
4. Tackle Low Rate Debt
Once you’ve got rid of your high-rate debt and a solid emergency fund is in place, consider putting more money into other debt, like student loans.
If you have more than one student loan, consider focusing on one at a time. Suppose you have four loans, each with a minimum monthly payment of $ 150, and you can afford to pay $ 1,000 per month. âI wouldn’t pay $ 250 for all four,â Heider says. âI would pay $ 150 on three and $ 550 on the fourth. Once that fourth is done, your minimum now, instead of being $ 600, is $ 450. This can help in a budget emergency.
5. Put it in writing
There is no such thing as a plan to stay on track towards financial goals.
Write it: Heider offers a spreadsheet with specific goals, such as: âThis loan will be paid off in 18 months. The next loan will be repaid in four years. In five years, I hope to have $ 40,000 in my 401 (k).
This allows you to stay focused on the next goal when paying off debt. âIt can help avoid the temptation to buy a new car when you really don’t need it,â Heider says.
Be explicit: âDesignating goals can be very helpful,â says Doll. “If I know I’m not going out for dinner this week, that means I can take my kids on vacation next year, [that] makes this decision much easier for me.
Integrate the rewards: Consider setting aside money for a trip or special purchase when you pay off each debt.
Look for “leaks”: Track where your money is going each month to find dollars that could be better used for your retirement and debt goals.
Even financial experts can be surprised. Michael McGrath, vice president of EP Wealth Advisors in Valencia, Calif., Recalls a former colleague who looked at his own monthly budget saying, âIt shocked me how much my wife and I spend at Starbucks . We almost spend the payment for a car! “