By Michael Vaughn, CFP®
If tackling debt while staying on top of your retirement plan feels like an uphill battle, you’re definitely not alone. With the average debt per person in America at $104,215 and 61% of those over 50 anxious about having enough for retirement, it’s a common concern.
But here’s some good news: you don’t have to choose between paying off debt and building your retirement savings. Sure, it takes focus and a solid strategy, but you can make progress each day toward both goals. A financial professional like our team at Pinnacle Family Advisors can help you find that sweet spot between managing debt and growing your nest egg. Read on and let’s make the impossible possible!
Debt Management vs. Retirement Planning: You Can Do Both
At first glance, paying off debt and retirement planning seem at odds. How can you squirrel away money for retirement when you’re paying off a mortgage, student loans, auto loans, credit card debt, or a personal loan—or all of the above?
However, debt management and retirement planning are complementary; they work together. The sooner you pay off the money you owe to someone else, the earlier you can begin paying more to yourself, giving the power of compounding interest a chance to work as you build your retirement savings.
Many financial professionals recommend saving 12% to 15% of your salary every year for retirement. That can be tough to do with debt payments chewing up a good portion of your income. But if you start small, you can work your way up—and someday you could have multiples of your yearly salary saved up. Right now the goal is to begin saving while still paying off your debt.
7 Steps to Paying Off Debt and Saving for Retirement
The daily weight of debt can be crushing, but you can dig your way out by taking a strategic approach to your finances. Consider these seven steps to pay down your debts and boost your retirement savings:
1. Analyze Your Debt, Spending, and Budget
Start by listing how much you owe and the interest rate of each debt. Examine your spending and cut out nonessential expenses, and then track your spending in a budget spreadsheet or app.
2. Set Clear Financial Goals
Having goals to work toward can help you stay motivated and stick to your strategy. Keep your goals reasonable and attainable, and adjust them as your income changes.
3. Debts vs. Investments
Compare the interest paid on your debts to the interest earned on any investments. If the interest on a debt is higher, make it a priority.
4. Prioritize High-Interest Debts
Pay off debts with the highest interest rates first to save the most money over time. When you eliminate one debt, use that monthly payment to boost your savings or accelerate another debt payoff. You also can consider consolidating multiple debts, giving you one payment with a potentially lower interest rate.
5. Incremental Savings Increases
As you pay off your debts, boost your salary, or receive gifts of money, put the additional money toward your savings.
6. Emergency Fund
An emergency fund covers unexpected expenses. Once you start saving, prioritize building an emergency fund to avoid future debt when something unforeseen happens.
7. Employer Match
An employer match in a 401(k) or other retirement plan is almost like a salary increase. If your employer matches contributions to your retirement plan, your contribution should be at least high enough to get the full match.
Work With a Trusted Professional
Paying off debt and retirement planning might seem like they’re at odds, but the more debt you eliminate, the more funds you have available to save for your future. At Pinnacle Family Advisors, our financial advisors can help you manage your debt and plan for retirement.
Reach out to schedule your complimentary introductory meeting by emailing me at [email protected], calling (417) 351-2942, or using my online calendar.
About Michael
Michael Vaughn is a CERTIFIED FINANCIAL PLANNER® professional and Vice President at Pinnacle Family Advisors (PFA) with 24 years of industry experience. Before joining the PFA family, he served clients with investment management and retirement planning at The Mutual Fund Store for 14 years. Michael graduated from Missouri State University with a bachelor’s degree in business administration and management and earned his CFP® certification in 2004. He also served 20 years in the Missouri National Guard, retiring in 2007 as a Major. He currently volunteers on the board of directors for Good Dads and Fellowship of Christian Athletes. Michael is married to Lori and they have two daughters. To learn more about Michael, connect with him on LinkedIn.