By: Nicholas R. Fernandes Founder CreditSage (Smart Credit Rebuilding)
There isn’t a straight answer to this, typically if you have debt you should pay it off first before making any future purchases but saving for retirement is important and the sooner you put money towards it the more you’ll have when you retire under the right circumstances.
Let’s dive deeper and see how you should approach this question, first evaluate your finances, break down all your expenses and income on an excel sheet. Put all the debt first, then follow up with all your expenses. In another column put your income after taxes.
Break it down and see what expenses you can live without, like the 80 dollars going to the different streaming platforms every month or the cable you have from your internet service provider that you never use. All the sports channels that you never watch. Not been to the gym since January of the year, then cancel your membership. You don’t need those entertainment magazines that you get every month. Break things down between needs and wants and cut out the unnecessary wants. You will easily be able to at least put away 100 dollars towards a rainy day fund or pay off some additional debt every month.
Now if your going the traditional route of just putting money away in a savings account for retirement then your better off paying your debt first, cause I can bet your interest rate on the debt is way higher than what any bank is offering for your savings account. Try and fix your credit first before so you can refinance at a lower rate, in check saving you money while you pay off your debt.
The reason I suggest paying off debt first if you are just going to put money away for retirement in a savings account instead of investing it. This is because the average inflation rate is 2.25% and the national average for APY what banks offer is 0.50%. You are actually losing money by keeping it in a savings account.
The alternative to keeping it in the savings account is investing it, first see if your employer offers a 401 K and try and match it for the amount that your employer will max it to. For example, if they put 100 dollars for every 200 you put in a month that’s a 50 percent return right away, granted you can’t access that money without taxation and penalties till your the age of 59 or if you need it for medical bills or are using it for a mortgage. In this scenario, we are primarily focusing on retirement which you will be better off maxing out your 401K before putting more money towards your debt besides the monthly payment.
The stock market average return after accounting for inflation is roughly 7 percent, if your debt interest rate is above 7 percent then it’s better to try and pay it off first or refinance at the least.
If your employer doesn’t offer a 401K you can open a Roth IRA to invest for your retirement. The Roth IRA has taxed money unlike the 401K and so unlike the 401K, the Roth IRA doesn’t penalize you for pulling your principle amount out. Instead of putting your money in a traditional savings account, you can keep it in a Roth IRA. Invest with caution and do your research in what is the best route to start when opening a Roth IRA, understand all the terms like what are dividends, bonds, yield, etc. This will probably be one of the biggest decisions in your life so take your time with it.
You might be asking how much is good for the rainy day fund? Well, there isn’t a set number but let’s go back to the expense sheet that you made and multiply that monthly total by 12, and that’s how much you should have tucked away in your rainy-day fund. Don’t confuse this fund with your retirement fund, any money you invest in the retirement fund partially doesn’t exist to you till you retire. The reason I say that this money has to be enough for you to live off the rest of your life from the age of 59. To be safe less say you live to be a 100, will the amount you invested be enough for 40 years? That’s why the earlier you start planning for retirement the more prepared you are.