This is one of those financial questions that always seem to arise at some point in life: should I pay off my debts or should I start saving for retirement? Under very happy circumstances, we should be able to do both; however, unless we’re billionaires, we may have to borrow the money needed for any of the situations above.
So how do we choose between the two, under these circumstances? Well, here are some thoughts.
Figuring Out the Interest Rates
Take a spreadsheet and start writing down the interest rates, going from highest to lowest. You should include everything from mortgages to student loans and car loans.
Making such a list will help you prioritise your debt payments. This way, you can see how it looks when it’s put against the potential growth of your own retirement payments.
Choosing to Pay Off the Loans
If the rate you pay is higher than the rate you earn from your investments, that means that you are saving just enough money for retirement to get an employment match – henceforth, you can pay off the loans.
For instance, if you pay off a credit card with an interest rate of 18%, it literally feels like you are getting an 18% return on your investments. It is a guaranteed return that can’t be matched anywhere else.
After that, the money that you have been using to pay off the debt can be directed towards your savings goals – which means that you can finally start saving for retirement.
Saving for Retirement on an Early Stage
Retirement savings are meant to grow with time, so the sooner you start putting money aside, the better. Retirement may seem very far away right now when you just joined the workforce, but the more you save right now, the less you will have to catch up later.
Most of the time, something from 6% to 10% of your income is perfect to set aside. It’s enough to pass through any kind of program that you and your employer will set up. Keep in mind that that’s FREE money that you would not be getting otherwise – so take advantage of it!
Remember that, if given the possibility, you may also want to pay yourself every once in a while. If your employer gives you this option, you can set up to have paycheck deductions which will go straight to your retirement funds.
You can also opt for automatic deductions, to ensure that you won’t miss any money that you want to set aside. As time passes, saving for retirement may earn you more than you would pay in a student loan interest. You may be saving small amounts of money, but you know the saying: a little goes a long way.
If you need a planner, there are always specialists that can give you advice on your savings plan. Most of it will depend on your interest rate; however, keep in mind that the earlier you start saving for retirement, the more you will be able to enjoy your life as a retired person.
