How to Save for Retirement When You’re Still Paying Off Debt
Saving for retirement should be a critical component of any financial plan, but it can be challenging if you’re also working toward debt repayment. The good news is that it’s possible to do both at the same time. The key is to be consistent and disciplined, and in time you’ll see the benefits of your efforts. Read on for strategies you can use to save for retirement while tackling debt.
Prioritize High-Interest Debt
High-interest debt, such as credit card debt, can quickly accumulate interest and make paying it off even more challenging. By addressing this debt first, you can reduce the amount of interest you’ll pay over time. The amount of money you’ll rescue from credit card interest can be applied to remaining debt payments. Once your highest interest debt is paid off, move onto the debt with the next highest interest rate. This is known as the avalanche method of paying off debt.
Build an Emergency Fund
Establishing an emergency fund will help you cover unexpected expenses without having to rely on credit cards and thereby adding to your debt. Aim to save at least three months’ worth of living expenses in your emergency fund before you start allocating more funds toward retirement savings.
Increase Your Cash Flow
Increasing your monthly cash flow will provide you with more cushion in your budget to save for your emergency fund, meet your debt repayment plan, and save for retirement. In order to increase your cash reserves, think about requesting a raise, making a career change, or taking on a side hustle.
Consider a Balanced Approach
A balanced approach involves allotting a portion of your income toward paying off debt and a portion toward saving for retirement. You’ll need to decide what percentage of your income should go toward each goal, but this approach can help make progress toward both debt repayment and retirement savings without neglecting one for the other.
Cut Expenses and Establish a Budget
If you’re struggling with debt and saving for retirement, it’s probably time to take a closer examination at your income and expenses. Where is your money going each month? What can you do to build better financial habits? Look for areas where you can cut back, such as dining out, shopping, and entertainment. Even small slashes in costs can have an impact on your finances. When you begin to pay attention to where your money is actually going, you can make informed decisions that will help you redirect more funds toward your savings goals.
Automate Savings
Automating savings is an ideal way to ensure that you’re on track to meet your retirement goals. If your employer offers a retirement plan that allows you to contribute a percentage of your paycheck toward retirement savings, be sure you’re taking advantage of it. You can also set up automatic transfers from your checking account to a retirement savings account like an IRA. Automating savings is a set-it-and-forget-it approach that provides consistent progress in saving for retirement.