Frugal Family

Retirement Plans- Paying Off Your Debts BEFORE Saving

Money experts suggest you start saving for retirement as soon as you can, whether or not you have an emergency fund or have debt. The earlier you begin saving for your future, the more money you will have in the fund. You can also benefit from an employer match if you contribute enough money to your 401(k) funds.

However, you should also consider your own situation. Living on a tight budget can be very difficult, and you might need to use the funds available to supplement your budget, instead of saving. Each person’s situation is unique.

So, when is the right time to start saving for your future? Should you pay off your debts first? Common sense dictates that you should do both when you can. We all love to get free money, and buy taking baby steps those little extra pennies will soon add up… making your new money super easy to save and feel like it’s just appeared out of nowhere!

Paying Off Debt First

Some people want to pay off their debt first, before saving for their retirement, especially when they have debts with high-interest rates. People typically pay a 15 percent annual percentage rate, so once they pay it off, they gain the 15 percent that went to the interest.

You can think of paying off your loans as an investment plan in which you get 15 percent in returns. That’s a good investment in any market, and that’s why it makes sense to pay loans off as soon as you can.

Instances in Which Paying Off Debt is Impractical

However, paying off the debt is impractical in some situations. Some people can’t repay their loans without credit check on time, no matter how hard they try. They would find themselves without any savings when they retire.

In the end, they remain in debt and unprepared for life after their professional career ends. They plan for their future when it is already too late.

People don’t want to invest in stocks because of the market fluctuations. There are years when investments might return more than 15 percent, and there are years when the return is less, or even years that lose money. However, people should know that investing in the market for the long-term will probably grow your money and outpace inflation.

The stock market returned an average of around 10 percent annually, to date. Money placed in a tax-deferred investment grows even faster. Not saving for a year or two, however, could have an impact on the funds you’ll use when you retire.

The amount of your monetary obligations can increase fast when left unpaid. You could get in and out of debt many times in your lifetime. If you are paying off your loans and savings at the same time, though, you will be better prepared for your future.

When to Save for Your Retirement First

If your current employer matches the contributions you make to your 401(k) funds, then you should consider saving for your retirement first. The employer’s match is free money that you should not take for granted!

If the employer matches 50 percent of your own contributions to a maximum of six percent of your salary, you should definitely contribute six percent to get the maximum amount from your employer.

You could actually consider the employer’s match as a bonus. You should save around three percent to six percent of your salary for the employer would match. However, you should not start your 401(k) funds if you are thinking of leaving the company in the future.

Your savings and your debts are two separate entities. You need to take care of both your present and future needs. You should include savings in your budget if you want to be prepared for your future. Your money troubles may come and go, but retiring is something that you can’t avoid.

Retiring is supposed to be fun, but there may not be much room for fun if you are worried about finances. One way to relieve the financial concern you may have is to spend part of the value of your home. You can convert that equity to cash by talking to a reverse mortgage lender. Unlike a traditional mortgage, any money you borrow with a reverse mortgage is paid back on a long-term basis, not through short-term or ongoing scheduled payments back to the lender. Therefore, as long as you stay in the home, you can enjoy your retirement and spend the money how you want without an additional scheduled bill to pay. However, you will retain home ownership, which means you have to take financial responsibility for continuing to maintain the home while you live in it.

How to Pay Off Your Debt and Save for Retirement

The most logical solution is to save money in an emergency fund first and pay off all your debt. Once you achieved those two, then you can start investing a portion of your income in a savings fund.

You can start by opening a $1,000 emergency fund. Then, you can prioritize on paying off your monetary burdens. If you face some unforeseen expenses in the future, you can use your emergency fund to cover them. That way, you can avoid taking on more loans.

Once you are free from your money problems, you can concentrate on increasing your emergency fund that should be able to cover three to six months of expenses. You can start your savings after you built up the assets in your emergency account.

What You Should Avoid

Most people try to work on different goals at the same time. They pay the minimum on their loans, save a little for their emergency fund, and invest a small portion of their income in a plan.

However, the only thing they really achieve by using this method is reducing their spending power. Their loans stay the same because they are only paying on the interest. They have little cash saved up for emergencies. Their 401(k) contributions are also too low.

According to studies, people without an emergency fund have a higher chance of taking out a loan or using their savings in case of unexpected expenses. People might also cash out part of their investments if life becomes tough in the future.

An emergency fund would protect your fund when times get difficult. You can survive any monetary crisis without sacrificing your future. While saving up for the future might not be the priority, it should be, and you need to consider starting a fund as soon as you can. The longer you build your nest, the more wealth you can have.

Create a Financial Plan

You should look into your own finances first and come up with a plan that suits your requirements and needs. If your finances allow you to pay off your obligations and save, then do so. Even if you are still early in your professional career, you should starting investing if you can.

If you have student loans and earn a good income, then you should prioritize paying them off early. Once you repaid all of them, you should invest all you can in a savings fund. However, that would not be the case if you have a low income and are struggling to make ends meet.

When you are struggling with your finances, you should consider focusing on one over the other, on paying loans off, rather than saving for retirement. For instance, if you have a car loan, student loan, and credit card balances, you should focus on reducing them first before putting money into savings. However, you should not forget about saving for your future. You can still contribute to your fund at a minimal level.

Getting a Loan Consolidation

You can get a loan with low interest and consolidate all your loans. That way, you can focus on a single account with lower interest. It is a simple process of taking several loans and combining them into one account. There are several ways to do it such as a debt consolidation loan, home equity loans, or a balance transfer.

Repaying all your debts would be a financial and emotional victory. You will not need to worry about your bills and making ends meet every month. Once you achieve freedom from loans, you gain peace of mind and can focus on your future.

If you are below the age of 35, you should deal with your obligations first. Having a retirement fund will all be for nothing if you have high amounts of debts you need to pay.

Hazel Newhouse

Hazel is a mum to 3 daughters and a son, she lives in Bedfordshire with her husband, kids and pets. Hazel has written for various publications, and regularly works alongside popular parenting and gardening brands.

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