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If your income has been affected by the coronavirus pandemic, maybe now is the time to find ways to stretch your finances a little more.
This is especially true if you are balancing multiple debts, anticipating less money, and unsure of how to prioritize your bills.
If you regularly invest in a retirement account, whether it is a 401 (k) account or an IRA, one solution might be to reduce the amount of your contribution and redirect that money to the repayment of the debt. While not ideal, doing it temporarily can free up some much-needed cash to meet immediate priorities that take precedence from time to time.
“Misappropriating some of your retirement savings to pay off credit card debt can make a lot of sense right now,” Brandon renfro, a certified financial planner in Marshall, Texas, told Select.
Below, Renfro explains when it makes sense to lower your pension contributions to pay off existing debt and what to do to make sure it’s worth it in the long run.
When to lower your pension contributions
“Given how fragile things are economically, I think it’s safe to focus on paying off credit cards,” Renfro said.
This is especially true if you have a credit card balance that you intended to pay off, but your job is now less secure and you’re concerned about a tighter budget.
To get by, you might consider doing just the minimum payments for a few months, which can make sense if you’re pretty sure your income will rise again in no time. But if it looks like you’ll be paying the minimum for a while, it could cost you more in the long run if you pay high interest charges on your debt each month.
Before the recession, many consumers turned to balance transfer credit cards like the Citi Simplicity® Card or the Wings Visa Platinum Card repay the debt over a period of six to 21 months without interest. But now that banks are making it harder to get credit cards, fewer consumers have that choice.
In this case, if you have the flexibility to use the money you spend in retirement to pay off debt, there are few immediate costs other than missing out on a few months of retirement savings, and saving a lot of money. interest might get you it’s worth it.
However, Renfro cautions against this choice without a plan.
“You’d be doing yourself a disservice if you just rolled up the balance,” he says, adding that it’s also important to know when and how you’re going to replenish your retirement after paying off your credit card.
How to bounce back when you’re finally debt free
You should have a plan to redirect the money back to your retirement savings at the same rate as before, if not more, to make up for the temporary break. Without one, Renfro argues, “you run a very serious risk of simply not getting it back.”
His strategy for rebuilding your retirement is rather simple: build on the habits you’ve learned while paying off your credit card debt by simply redirecting the extra funds you put on your credit card to the amount you set aside for. retirement.
For example, let’s say you lower your pension contributions so that you have an extra $ 200 per month to spend on your credit card debt. If your minimum payments are $ 160 per month, this could allow you to make monthly payments of $ 360 until your credit card is paid off.
Once you’ve successfully paid off the card, instead of bringing your pension contribution back to its previous levels, Renfro suggests seeing if you can afford to allocate that extra $ 160 that was part of your repayment budget. from debt to rebuilding your retirement.
The information on the Wings Visa Platinum card was independently collected by Select and was not reviewed or provided by the card issuer prior to posting.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.