Should You Pay Off Debt or Save For Retirement?
Paying off debt can drastically affect how you spend your money, and shift the focus away from retirement.. but should it? If you’re wondering if you should pay off debt or save, read my personal experience to find out!
This post may contain affiliate links, which means I may earn a small commission at no extra cost to you. For more information, please see my disclosure here. Thank you for your support!
I started my first office job at the ripe age of 18 working as a receptionist for a small insurance company.
I was fortunate enough that the company had a really affordable health insurance plan. They also offered a 3% match of the employee contributions into their 401K plan.
I didn’t start contributing right away, but eventually, I started off by putting away 1% of my salary and worked my way up over the years to the 3%, so I could get the full benefit of the employer match.
I felt very proud of this decision as I felt I was making headway into my financial future.
Fast forward 5 years down the road…
When I decided to part ways with the company things weren’t looking so great for me financially.
I had gone through a complicated pregnancy. It required me to miss a ton of hours at work and reduced my income significantly.
Not to mention that the affordable insurance plan I was on turned out to be not so affordable after all.
I was left with a hefty bill of about $8K for labor and delivery when it was all said and done!
With the collectors knocking at my door, when I was faced with the option of rolling my 401K money or getting a one-time payout, I chose to have the money available to me right away.
It seemed like the right decision at the time.
I could pay off some of the past due bills and maybe get a little breathing room since I was using cash advances from the credit card to complete the money for rent.
But looking back, now that I am debt-free, I can’t help but wonder how much money I would have now had I left that money alone and found other avenues to fix my money woes.
This brings us to a very important question…
Should You Pay off Debt or Save for Retirement?
Using some simple investment calculators, I’ve estimated that had I rolled the money I had in my 401K at the time, I would have more than doubled my investment by now.
Instead, I paid a ton of penalties and taxes for taking the money out early.
I also missed out on years of potential investment growth!
If I could go back in time, I would do things differently.
I know it’s really tempting to use “some day” retirement money to solve an immediate money issue now, but this can be extremely costly in the long run!
Instead, I like to advocate for paying off debt AND saving for retirement simultaneously. Even if you only put a little bit away each month!
Related Posts:
5 Amazing Tools to Rule Your Money This Year
How to Find Joy in the Midst of Debt
6 Healthcare Costs That Aren’t Worth the Money
How to Invest for Retirement
If you’ve read this far, and I’ve managed to convince you that you should save for retirement, even if you’re still in debt, you might be asking how exactly can you make this happen.
Let’s break it down into doable steps:
Step 1: Take advantage of free money
If you are employed, check what kind of retirement benefits your company offers.
They may offer a match to the employee contribution.
If so, I recommend that you invest up to that amount so you can maximize the “free money” benefit your company is offering.
If that is unmanageable at the moment, start with the lowest possible percentage you can contribute, and work your way up every few months.
It’s easier to get used to missing $20 a paycheck than $100 all at once.
If your employer does not offer a contribution match, I recommend contributing to the plan anyway, using the same approach as above – begin with the smallest amount possible and work your way up.
A 1% contribution may seem insignificant, but several years down the road it could represent a hefty sum.
Don’t get discouraged by the numbers. 1% is still better than nothing!
Step 2: Going solo
What happens if your company doesn’t offer a retirement plan?
I used this for many years after I left my first office job as an excuse not to contribute to my retirement. I wish I hadn’t!
If your company doesn’t have a retirement plan, you can open up an IRA in just a few simple steps!
Choose a reputable company such as Vanguard or Fidelity.
I’ve had IRA’s with both these companies and they’ve both been great.
In my experience, Vanguard tends to have more options and less fees, but Fidelity’s platform can be more user friendly.
Either way, don’t let a lack of employer-sponsored 401K limit you.
Step 3: Choose a safe investment
The last thing you want to do when you’re in the middle of working towards your debt-repayment goal is to worry about losing your hard-earned money on some sketchy investment.
If you don’t know a lot about investments, start off with an index fund (and don’t reply to that email from the Nigerian prince!)
What is an index fund?
Without getting too technical, an index fund is the type of mutual fund that pretty much follows a stock market index, like the S&P 500.
If the market as a whole does well, then the index fund will do well.
Since the market goes generally up, your index fund will go up as well over the years.
Here’s a really short video that explains how an index fund works 🙂
In my opinion, index funds are an excellent option for starting out.
Not only do they take the guesswork out of investing, but according to CNN, index funds also tend to do better than funds actively managed.
Heck, even Warren Buffet advocates going with index funds!
Step 4: Set it and forget it
Notice I said that these funds perform well over the years.
However, this doesn’t mean that your investments will never take a dip, even if you go with an index fund.
This is why it’s important to have the mentality to “set it and forget it” when you start investing.
If you focus too much on how your investments are performing, you may get tempted to start moving them around.
This can be more costly in the end.
Not only that, but this will add unneeded stress to your life!
When you’re trying to become debt free, added stress is something you can do without.
As a side note, I had a friend once who had a mild heart attack when he saw his investments take a nose dive overnight.
It can really get to you!
It’s important to check how things are going sporadically, but avoid becoming obsessed with it (which is easy to do).
Vanguard, for example, offers the kinds of index funds that you can truly set and forget.
With their “Target Retirement Funds”, you choose how many years you have until retirement.
Then, they automatically set the fund investments to become more conservative as you near your target retirement age.
Step 5: Reassess your priorities
As you make progress towards your debt repayment goals, you may want to reassess how you would like to allocate your money.
Perhaps you’d like to choose for the freed up cash to go towards retirement, or towards building up an emergency fund.
Remember that the state of your finances will change over time.
Prioritize according to your short and long term goals, and make any necessary changes as you reach those goals.
For example, over the past five years, I’ve aggressively increased my retirement contributions.
I wanted to try and make up for all the years of growth I lost early on.
Meanwhile, I’ve been building up my emergency fund more slowly.
If you’d like to learn more about how I was able to pay off over $50K of debt on one income, and how you too can become debt free, you can sign up here to receive a free step-by-step guide!
Although paying off debt should be a priority, it’s important not to neglect retirement contributions.
Don’t wait to completely pay off debt to save on retirement. This will cause you to lose valuable growth on your money.
Instead, even if you’re still in debt, make it a point to start investing in your future today!
Are you currently contributing to your retirement? What is your priority right now when it comes to money? Share with us in the comments below!
