How to balance paying off and saving for retirementMonday 29 June 2020 | Reading Time: 4 minutes
Paying off your debt and saving for retirement are two, very big priorities in your financial life. Unfortunately, many of us have a difficult time choosing which one is more important. However, if you’ve been wrestling with the choice, the good news is that you don’t have to. It is possible to save for retirement and get rid of debt at the same time with some good money management. Here are some tips to balance these financial responsibilities.
Review and reformat your budget
To have enough money to save for retirement and to pay off your debt, you need to figure out how much income you have and what you are spending it on. Tally up your general expenses, as well as how much your debts are costing you every month and rank them in order from the highest interest rate to the lowest. Once you know your income and expenses, it’s time to look for items to cut in your budget.
If you’re serious about paying down debt and saving money, you will have to make some sacrifices. Can you cut back on cable? Can you cook more often and spend less on restaurants? These are the kind of questions you should be asking yourself as you comb through your budget and search for line items that can be reallocated for debt payments and retirement savings. Make a PDF budget worksheet or track your expenses with some help from budgeting apps.
Set hard limits for expenses
Once you have a budget set, you need to stick to it. It’s a good idea to establish firm limits for any budget item that isn’t a bill or payment. Variable expenses like entertainment, gifts, and restaurant dining should be reined in so you can ensure you have the funds for your goals. One method that can keep your spending in check is to set up a checking account for variable expenses only. This can help prevent you from going over, or instantly borrowing funds from other line items. Once the money is gone in your variable expense account, you must stop spending money on those items.
Make a debt reduction plan
Now that you have a budget you can stick to, it’s time to start chipping away at your debt. Make a list of your debts from the highest interest rate to lowest. Your goal should be to pay off the highest-interest loans and credit cards first because they cost you the most in borrowing costs. To make headway you need to pay more than the minimum amount each month. Once you’ve paid off a credit card, put the monthly amount used to pay it off toward the next highest debt. If you have a small balance left on a debt with a lower interest, you can make an exception to the top-down rule. Eliminating a debt, even a small one, is a good morale boost.
Automate your money
Once you know how much money you want to allocate for debt costs and saving for retirement, consider automating your payments on your loans and credit card payments. It’s also a good idea to set up a direct deposit to a savings account and 401(k) plan contributions so you never miss a month. This process may take out the steps that manual payments require, so you won’t have to keep remembering to pay your bills. Not having to continually review and coordinate your payments will also be a lot less stressful.
Earn extra cash
Tightening your budget may feel too restrictive. To give yourself a little breathing room, consider taking on a part-time job or starting a side hustle for extra cash. Whether that’s driving passengers, freelancing online or selling stuff you don’t need, there are a variety of ways to earn more money.
Talk to a financial professional
A financial professional1 or agent can provide you with expert guidance and recommend strategies to maximize your savings or reduce debt quickly. If you need help to balance paying off debt and saving for retirement, finding a financial professional near you may be the right option.
1. The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.