Save for retirement or get rid of debt? The answer to this serious financial question is often difficult. But if you’re having a hard time choosing which one is more important, the good news is that you don’t necessarily have to. It is possible to do both. Here are 6 tips to help you find the right balance.
Revise Your Budget
The first step is to figure out how much income you have and what you are spending it on. Tally up your general expenses, as well as how much your debts are costing you every month and rank them in order from the highest interest rate to the lowest. Once you know your income and expenses, it’s time to look for items to cut in your budget.
If you’re serious about paying down debt and saving money, you will probably have to make some sacrifices. Can you cut back on cable? Can you cook more often and spend less on restaurants? These are the kind of questions you should be asking yourself as you comb through your budget and search for line items that can be reallocated for debt payments and retirement savings. Make a PDF budget worksheet or track your expenses with some help from budgeting software apps that automatically update and categorize transactions, helps you track bills and set budgets that alert you when they start to top out.
Limit Variable Expenses
Once you have a budget set, you need to stick to it. It’s a good idea to establish firm limits for any budget item that isn’t a bill or payment. Variable expenses like entertainment, gifts, and restaurant dining should be reined in so you can ensure you have the funds for your goals. One method that can keep your spending in check is to set up a checking account for variable expenses only. This may help prevent you from going over, or instantly borrowing funds from other line items. Once the money is gone in your variable expense account, you should stop spending money on those items.
Pay Debt Top-Down
Now that you have a budget you can stick to, it’s time to start chipping away at your debt. Make a list of your debts from the highest interest rate to lowest. Your goal should be to pay off the highest-interest loans and credit cards first because they cost you the most in borrowing costs. Once you’ve paid off a credit card put the monthly amount used to pay it off toward the next highest debt. If you have small balance left on a debt with a lower interest, you can make an exception to the top-down rule. Eliminating a debt, even a small one, is a good morale boost.
Look for Additional Revenue Streams
With a tighter budget, you may want to give yourself a little breathing room. Consider taking on a part-time job or starting a side hustle for extra cash. Whether that’s driving passengers, freelancing online or selling stuff you don’t need, there are a variety of ways to earn more money.
Set Up Direct Payments
Once you know how much money you want to allocate for debt costs and saving for retirement, consider automating your payments on your loans and credit card payments. It’s also a good idea to set up a direct deposit to a savings account and 401(k) plan contributions so you never miss a month. This process will take out the steps that manual payments require, so you won’t have to keep remembering to pay your bills. Not having to continually review and coordinate your payments will also be a lot less stressful.
Meet with a Financial Professional
If you need help to balance paying off debt and saving for retirement, make an appointment with a financial professional who will examine your current finances, provide you with expert guidance and recommend strategies. You can visit our website to find a financial professional1 or agent that’s right for you.
1.The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.