Choosing Between Paying Off Debt or Saving for Retirement? Here is What You Should Consider

One of the great problems that most people face in life relates to managing debt. Some experts are of the view that one must allocate income in a way to get rid of debt as soon as possible. But what is equally important is to save for the retirement.

So, what is the best financial decision? Should you focus on getting rid of your debt or prefer saving for your retirement?

The answer, according to David Ramsey, a National best-selling author and radio host is definitely to hold retirement savings until you are able to pay off the debt. In his book “Baby Steps”, he offers the following four steps for financial success:

 Step 1: Save $1000 for emergency fund.

Step 2: Pay off all the debt except house mortgage.

Step 3: Save about three to six months’ salary for a rainy day.

Step 4: Invest about 15% of income in retirement accounts with tax benefits.

In Ramsey’s financial success formula, retirement savings do not come into the picture until the forth step. He says that the four Baby Steps will add to financial security and lay the foundation to build wealth that will last for a long time. It will also ensure that you don’t fall further into a debt hole.

Laurie Itkin, who works as a financial advisor at Coastwise Capital Group in La Jolla California, is also of the view that it’s better to pay off high interest debt before thinking about saving for retirement. The reason is that the interest that you have to pay will be higher than any returns you get from your savings. As a result, you will end up losing money instead of growing your net worth.

In contrast to the views of these financial pundits, Amy Podzius, a TIAA Financial Consultant based in Chicago, advices that individuals should take a balanced approach and do not lose the opportunity of contributing to a retirement plan offered by the employers. She says that retirement savings grow over time, so the sooner you contribute to the account, the larger will be the nest egg.

Graduates today are encumbered with student loans. If they put off contributing to their retirement account later, they will not be able to build a sufficiently large retirement nest egg.

According to Podzuis, an individual should set aside about six percent of the income, which is usually enough for most employee retirement plans. The employers matching contribution is simply free money that everyone should take advantage of.

In the end, the answer to whether to focus on paying debt or saving for retirement depends on the financial situation of the individual. You should not become paralyzed by the complexity of the question. Instead, focus on assessing you current financial status and take instant action to make the best of the opportunity. For some the best course of action will be to eliminate the debt first before saving for retirement, while others will find it better to balance things out.