No matter how much money you make or what stage of life you're in, you should put spending and saving at the top of your list. It could be challenging to choose which significant financial objective, like debt repayment or retirement savings, to concentrate on first. What sort of priorities do you set if you do have extra money? You shouldn't think of it as an either-or situation. Finding the ideal balance for you is the key. Below, you’ll find a few steps that will help you pay off your debt and make some savings for your retirement.
Review your budget to increase your savings and reduce your debts
Include line items for every cost and savings goal when creating a budget, including paying off debt and increasing retirement savings. Even if your monthly contributions are small, you're developing excellent habits. For one or two months, examine your spending and areas where you may cut costs. To create a baseline, look over current invoices and bank and credit card data and adapt following your financial objectives. You might find more money if you consider how you spend your time. For instance, you might be able to get a cheaper monthly deal if you use fewer minutes on your cell phone plan.
Have an emergency fund in place to avoid getting into debt unexpectedly
Make it a goal to accumulate an emergency savings fund if it would be tough for you to pay for unforeseen expenses like car repairs that necessitate an urgent outflow of cash. Take it slow; as a starting point, concentrate on saving just one month's worth of income. Make additions to it according to your abilities. An emergency fund can help you avoid or reduce "bad" debt. "'Bad' debts usually include payday loans or credit card debt. They impose higher interest rates, which can keep you from making progress. Unexpected expenses might be paid out of emergency money rather than using a credit card. Debt has its place, but using it intelligently might benefit you more in the long run.
For more information on emergency preparedness and setting up an emergency savings fund, be sure to check out our guide.
To receive the minimal match from your employer, save towards retirement
Don't you think getting free money would be an excellent way to save? You receive this if your employer gives a matching contribution to your 403(b) or 401(k) retirement plan. For instance, if you save 5% and your employer matches it, your savings will increase twice. That means that without any additional budgetary adjustments from you, $50 saved doubles to $100 saved. Work on raising the percentage you contribute to that retirement account until you at least match your employer's maximum contribution.
Set some goals to reduce your debt
Your level of debt influences your decision-making in many different ways. For instance, having too much debt concerning your income may prevent you from getting the loan rate you want if you want to purchase your first home or upgrade to a larger one. Setting debt repayment as a top priority might aid in doing this. That said, you shouldn't stop investing for retirement until all of your debt has been paid off. It is unreasonable to imagine that you can cease preparing for retirement to pay off your debt more quickly because most of us have competing timelines and goals. Knowing how long it will take to reach that acceptable debt ratio is crucial, and you should set your other goals accordingly.
Take care of expensive debts first
There may be "good" debt and "bad" debt. You can be in a favorable position to increase your retirement savings if your only debts are "good," like your car and mortgage. If not, establish a list of all your debts and the attached interest rates. Prioritize paying off debt with a higher interest rate, like a conventional credit card. Credit card consolidation is arguably the best way to eliminate all your credit card debt. This method combines multiple credit cards with separate due dates and interest rates into a single monthly payment. The return you would receive from saving that money could be lower than the interest you pay. If you can, pay more than the required minimum each month. Move on to the following loan on your list after paying off the debt with the highest interest rate. After you're done paying them off, think about allocating the same sum to retirement savings that you did to debt repayment.
Contribute more towards your retirement savings
To save more money for retirement you don't necessarily need to be debt-free to save more money for retirement. Your priorities and ambitions will determine this. Finding the ideal ratio between saving and debt repayment is important. Comparing how much you should save for retirement to what you can save can be intimidating. Instead, consider taking baby measures to help you reach your objectives. For instance, you may boost your retirement savings every year until you're making contributions at a level that enables you to achieve your goal. Your monthly budget will not likely be significantly affected by that modest annual increase. Still, it will have a long-term beneficial effect on your ability to retire with more security.
Do you have more questions about the retirement planning process? We put together this retirement planning checklist to help you get started!
Understanding your financial situation helps make plans. Don’t be afraid to seek help if you're overwhelmed. A financial expert can help you understand your options. Ask your HR department or employer if your company's retirement savings plan provides this service. There are plenty of online resources for whatever your financial needs may be– including your estate planning methods.
At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning options today!
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