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Should You Pay Off Debt? Or Save for Retirement?

Is it better to pay off all your debt first? Or should you save for retirement?

It seems the answer would be to pay off debt first, since it grants immediate satisfaction, but saving for retirement may provide bigger long-term savings. Logically speaking, saving for retirement comes first.

#1. Maximize Employer Matches –

If your employer matches any of your retirement contributions, take full advantage of these guaranteed return-on-investment plans.

“Employer match” refers to paying ?X amount for every ?Y amount an employee contributes to the plan. In other words, if employers match ?0.30 to every pound contributed by an employee, then an employer matches ?30 for every ?100 contribution.

Of course, employers put a cap on how much they match employee contributions, and you should be investing this full amount. If employers cap out at five percent of your income, then you invest five percent.

#2. Pay Off High Interest Debt –

After you are setting money aside for retirement, it is time to tackle high-interest debt.

Forget about mortgages and low-interest debt for now. Instead, focusing on paying off those credit cards by throwing every bit of extra money you make at them. Cut back on your holiday expenses and other discretionary items, so that you can repay your credit cards as quickly as possible.

Whether you attack these high interest debts in order from smallest amount to lowest amount, or you prefer paying off the one with the highest interest rate first, the important thing is to start paying them off.

#3. Create ?1,000 Emergency Fund –

Avoid going into debt again by starting an emergency fund. Put in at least ?1,000 or one month’s wages. Use these funds for emergencies like job loss or a surprise medical visit to an emergency room.

Don’t use the money for routine expenses like repairing the car or fixing a broken vacuum. You should plan for those types of routine costs in your ‘ordinary’ budget, and save your emergency fund for “real” unexpected expenses. After all, you know that your car is going to break down someday – so it’s not truly “unexpected,” is it?

#4. Invest at Least 10 Percent Towards Retirement –

Saving for retirement is important, so you need to start investing at least 10 percent of your income. 15 to 20 percent is better. Many people under 40 think that they don’t need to start worrying about retirement yet, but this is a mistake. The earlier you start saving, the better.

#5. Build Up Your Emergency Fund –

Finally, start enhancing that emergency fund to handle severe situations. Ideally, you need at least three to six month’s worth of wages saved in your bank account.

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