When faced with two big financial priorities, such as paying off old debt and saving for retirement, it can be easier to focus on just one. For people repaying student loans for themselves or their children, for example, 38% weren’t able to put money away for retirement, according to a 2015 survey from the National Foundation for Credit Counseling and NerdWallet.
Neglecting either one can be a losing proposition. If you focus just on repaying debts, you can lose out on potential investment returns from money placed in a retirement account. On the other hand, you don’t want to pay more interest on debt than you need to. So here are some steps to help you save while reducing what you owe:
STEP 1: Pay at least the minimum on debts consistently
Missing a loan or credit card payment can cost you in extra interest, fees and a dip in your credit score, so make sure to pay at least the minimum required amount each month. That said, don’t go overboard in paying at this point. If you rush to erase the debt as fast as you can, you might miss out on potential long-term gains from investing your money now.
STEP 2: Secure your future with an IRA!
An Individual Retirement Account is a good option to consider if you’re trying to build a nest egg—particularly if you don’t have access to a 401(k) plan at work or you feel you need to save above and beyond your 401(k) contributions. Simply put, an IRA is a special type of investment account specifically meant for retirement savings that provides tax advantages that you can’t get from a regular taxable brokerage account.
For individuals with taxable income, there are two main types of IRAs to choose from: the Traditional IRA and the Roth IRA.
Of course, there are likely to be myriad other considerations before you make a decision, and remember that you’re not wed to contributing to one type of IRA until retirement rolls around. So weigh your options carefully, and think about consulting a tax adviser or financial planner to help you figure out the best strategy for you.
STEP 3: Focus on paying off debt
Once you have started setting aside some money for retirement, you can turn your attention back to reducing your loans or credit card balances. By paying off more than the minimum each month, you eliminate your debts faster and cut the interest you end up paying. Consolidation allows you to restructure your finances in a way that merges several bills into a single monthly payment. This helps you get back on track faster and can help improve your credit score as well.
As you manage these two goals, remember to build an emergency fund as well, so that you have ready cash to cover unanticipated expenses. If you don’t, you might end up back in debt or draining your savings.
By following these steps, you can avoid having to choose between your retirement goals and paying off debt. Taking advantage of the opportunity to save money now and to reduce debt can help you improve your financial life for years to come.