Having clear financial goals can help you make smarter money choices day to day that add up to real, tangible results over time. Common goals include saving for a down payment on a home, paying off your student loan balance, or retiring early. But these financial milestones don’t just happen overnight.
They’re the result of all of the smaller steps you take every day.
The real challenge is managing competing financial obligations. When you have more than one goal, it’s essential that you make your money choices with both of those goals in mind—which may seem easier said than done.
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Many Americans find themselves at a common crossroads: whether you should use your money to pay down debt now, or put it away for retirement and spend it later on.
The short answer: you should be doing both. The longer you take to pay off debt, the more you’ll pay in interest over time. And the longer you hold off on saving for retirement, the less you’ll have to live off of in your golden years.
General rules of thumb suggest that you should aim to save about 12%–15% of your annual salary each year as early as possible. Of course, for those just entering the workforce, it’s perfectly fine to work your way up to this figure. However, the challenge comes in when you’re actively working on hitting other financial goals. Say you took out federal loans to pay for college and you’re on an income-based repayment plan that sets your payment at about 10% of your discretionary income (the standard for most repayment plans).
When all is said and done, a large portion of your income is already accounted for before you’ve covered your basic living costs and other non-negotiable expenses.
So, how do you manage both goals?
Start by taking stock of your debt balances, interest rates, and minimum payments. This will tell you how soon you can expect to be debt-free and how much of your monthly income is going toward your debt. It’ll also tell you how much you’ll pay in interest over the life of your loan.
If you have smaller debt balances, you might have the flexibility to save less for retirement for the time being and put more toward eliminating your debt. However, you don’t want to put saving for retirement on the backburner altogether. The earlier you start saving for retirement, the more time your money has to grow.
Debt can feel all-consuming if you don’t have a plan of attack in place—that starts with a budget and a debt repayment strategy.
If you’re not closely monitoring your monthly spending, you could be missing opportunities to save or redirect your money toward your debt payments. Saving a few dollars in each of your spending categories can add up and make a difference in your overall debt balance and how long it takes you to wipe out your debt completely. If you can cut corners to save even $50 per month, you can put half toward your debt and put the rest in your retirement account for later.
“Take a moment to look through the charges on your cards. There may be subscriptions you no longer use or didn’t even realize you had (think free trials you forgot to cancel). You can go ahead and cancel these to help lower your spending, giving you more money to save,” says Kendall Meade, a certified financial planner (CFP).
After revamping your budget, you might find that you’re still only able to make the minimum payment on your debt balances. In these cases, you might consider refinancing or consolidating your debt.
“This can be helpful if you are able to get a lower interest rate, reducing the total amount you owe, allowing you to pay it off quicker,” says Meade. “It can also be helpful since credit cards have variable rates, hence the interest rate on your card may increase if interest rates increase. By refinancing this debt to a fixed rate you can lock in your rate.”
And then, there’s your repayment plan.
Your budget will tell you where your dollars are going, and how much you can afford to throw at your debt balances each month, but your debt repayment strategy will help you be more intentional about which balances you’re targeting first. Two popular strategies—the snowball method and avalanche method—target either your smallest debt balances first to get the ball rolling, or your largest debt balances to save you money in interest over time. If the goal is to prioritize saving for retirement, attacking your largest balances first and saving smaller balances for later as you get closer to retirement and want to contribute a larger percentage of your income toward your retirement account could be wise.
There is no right or wrong way to go about paying off your debt, ultimately the right strategy will be the one that helps you build the momentum you need to keep going.
Saving for retirement doesn’t have to be a solo journey. One key way to grow your balance is to take advantage of contribution matching, which may be offered by your employer. Knowing that your company will match all (or at least a percentage) of however much you contribute is incentive enough to make saving for retirement a priority.
What’s more, if your employer offers a match, that frees up room in your budget to allocate more toward your debt repayment.
Let’s say your goal is to save 10% of your income for retirement. You can opt to save 5% and have your employer cover the rest. That way, you’re still hitting your retirement savings goals, without compromising any progress on your debt repayment. As you continue to pay off your debt or your income increases over time, you can think about increasing your retirement contributions.
Another option: think carefully about when it makes sense to retire as far as your Social Security benefits are concerned. When you choose to retire will inform how much you’ll receive in benefits later and how much you should be saving now.
Once you reach your full retirement age, you can begin receiving your full Social Security benefit. If you delay your benefit until reaching this age, you may also get delayed retirement credits, which increase the amount you receive. A higher monthly payment could reduce how much money you need to withdraw from your retirement savings.
“A few small mistakes can take a big hit on your golden years. The earliest age you can sign up for Social Security is age 62, but if you file before full retirement age (as defined by the IRS), you’ll be looking at a reduced benefit of approximately 75% of the amount you’re eligible for,” says David Rosenstrock, CFP.
“Full retirement age depends on your year of birth. You can also delay your filing past full retirement age. For each year you delay your benefit, up until age 70, your benefit will grow 8% enabling you to receive a maximum of up to approximately 132% of your regular benefit amount. Delaying your filing will clearly leave you with more money on a monthly basis but you need to consider whether it will mean getting the most money on a lifetime basis. If you don’t expect to live very long because of health issues or your personal family history, then it could make more financial sense for you to claim benefits at full retirement age or even sooner to receive the highest lifetime payout.”
Paying down debt to free up more of your income now and saving for retirement so that you can live comfortably later are important goals to keep at top of mind, but prioritizing both goals could feel like you’re working against yourself. Knowing how much to allocate toward each goal will depend on several factors, like how much you owe, the interest rates on your debt, how many years you have until retirement age, and more.
However, there are small ways to make progress toward both goals that can pay off in the long run.
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