Should I Pay My Debts or Save for Retirement?
Debt reduction and retirement investing are both important to your financial health. By weighing the benefits of each with your personal situation, you can make a smart move with your money.
[MUSIC PLAYING] So you just landed a job with a retirement savings plan. Everyone older than you was saying, whatever you do, save for retirement. But you have financial burdens facing you right now. So what are you going to do?
First off, you need to be a good judge of where you are financially before you can take a step in the right direction. Here are the main things to consider as you weigh your decision.
One-- your company match for retirement savings. Most companies have a 401(k) matching plan up to a certain percentage. For example, if you put in 5%, they'll put in 5%. That's like getting a 5% raise just for doing what you're already doing.
If your company does this, find out what your paycheck would look like if you saved the maximum amount for the company match. Remember that your 401(k) contributions are not taxed until you withdraw that money at retirement. If there's any way that you can afford to do this, you really might want to think about it.
Two-- your debt situation. If your debt situation is truly out of control, then you'll want to take care of it right away. Create a small emergency fund to absorb unexpected costs that you normally cover by taking on even more debt. Try $500, $1,000, or the amount of one of your new paychecks. Then pay off your highest-interest debts.
Most likely, your credit card is the monster on the loose. One way to tame your credit card is by consolidating your debts. This can give you one low interest rate, and you'll have a manageable, long-term plan to eliminate your debt.
Then you should literally leave your credit card at home. This will keep you from swiping it for everyday expenses-- one of the main reasons that debt piles up.
So here's the bottom line-- save for retirement if you can. In fact, you might want to consider retirement savings and essential part of your budget, just like your gas and your groceries. Why? Here's a quick comparison to show you the benefits over time.
What happens to a $5,000 credit card balance? With a 15% interest rate, a monthly payment of $83 will take you about 10 years to pay off. What happens to $5,000 invested in a retirement account? With a 6% return, leave it alone for 10 years, and it'll turn into about $9,000.
So you make the call. If at all possible, try to do both. Pay off your debts, and save for retirement at the same time. Start doing both of these things right now, and you'll create healthy financial habits for the long run.
The information provided is not intended to be legal, tax, or financial advice. BB&T hopes you find this information useful but we cannot guarantee that it is accurate, up to date, or appropriate for your situation. Financial calculators are provided to assist you in estimating the approximate costs associated with any bank activity. Your actual costs may vary. You should consult with a qualified attorney or financial advisor to understand how the law applies to your particular circumstances or for financial information specific to your personal or business situation.
Branch Banking and Trust Company, Member FDIC.