Pay Off Debt or Invest?
For most people, the answer is both. As with anything related to finances, multiple goals deserve attention simultaneously. While reducing debt is important, it is also imperative to begin saving for retirement early to take full advantage of compounding growth over time. Here are some tips as you determine how to prioritize.
NOT ALL DEBT IS CREATED EQUAL
Not all debt is financially problematic. Mortgages, reasonable auto loans, and low-cost student loans are not in the same category as a high interest credit card. Address high interest debt first. Once you have paid off more onerous loans, consider shifting a larger portion to savings.
MAKE SURE YOUR DEBT IS EFFICIENT
While it is not ideal, many people carry balances on their credit cards. That said, most people do not evaluate opportunities to lower their interest rates. Credit card companies often provide balance transfer offers of very low or no interest for 12 to 18 months*. There is typically a fee to transfer equal to 2%- 3% of the balance transfer. For example, we have a $10,000 credit card balance at 20% interest. If the balance was transferred to a new card at 0%, the interest would be $300 for the year instead of $2,000, which is an 85% savings. Moreover, the payments would actually go toward paying down the balance instead of being applied to interest speeding up the debt repayment timeline.
MAKE SURE YOU ARE GETTING YOUR EMPLOYER MATCH IN YOUR WORK RETIREMENT
Many employers will provide matching dollars for your contribution to retirement. If you add $1,000 to your work retirement they will match that with a $1,000 employer contribution. Most typically, this will be up to a certain percentage of your salary (i.e. 3% of salary). You always want to contribute up to the match as you are earning a 100% return on your savings.
ESTABLISH AN EMERGENCY FUND
An emergency fund gets at the root cause of why consumers go into debt in the first place. People take on debt to buy things they do not have the cash to pay for now. Having emergency reserves ensures that there is cash available for emergencies and planned spending.
PUT TOGETHER A PLAN AND PUT IT ON AUTOPILOT
Earmark set amounts for retirement savings, emergency funds, and debt repayment. Even small amounts add up over time. Schedule regular transfers to savings and automate debt payments. This ensures that your plan is always running and that you stay on track.
*Opening and closing lines of credit can impact your credit score. Balance transfers are a tool that can be useful when combined with a diligent debt repayment strategy.
This is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
LPWM LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers.