Everyone wants to create the future of their dreams, but when you have a lot of liabilities, it can be hard to get the ball rolling. What’s more, there are some situations where it’s hard to know whether you should pay debt or save for retirement. Which option is best for you? It all depends on where you currently are in life, and these points might help you make a smarter choice.
Debt in America
In 2019, researchers found the average American household debt to be a whopping $5,700. More than 40 percent of all households had some form of credit card debt, and the lowest-net-worth homes had an average of more than $10,000 in such liabilities. Notably, the effect of debt was skewed even if the amount wasn’t. Although people with higher incomes had larger debts, their bigger paychecks also meant that their liabilities were much smaller percentages of their earnings compared to poorer households.
Deciding Whether to Pay Debt or Save for Retirement
Saving for retirement is all about economies of scale. For instance, no matter how much money you put into a portfolio in the hopes of generating returns, you won’t collect nearly as much of the benefits as the broker does. Your retirement fund manager makes money by pooling lots of it together. The small amount of profit that your cash produces only accounts for a fraction of the total gains.
Similar considerations of scale apply when you’re choosing whether you should pay debt or save for retirement. You’re comparing the interest that you stand to gain by investing to the amount that you’re currently losing to debt and fees. In this case, however, there’s also another important factor besides the amount of money you have: time. To gain more from your investment activities, you can either:
- Let your investment money, or principal, sit around a while and collect interest at a particular rate, or
- Increase the amount of principal that you invest to raise the impact of the interest rate.
The glaring problem with both of these scenarios is that debt makes it impossible for your principal to achieve its full potential. Although you may want to save for retirement, you won’t be able to accumulate nearly as much if you possess liabilities that limit how much you can invest.
What about when you only have small debts that won’t bite huge chunks out of your retirement capital? Although this situation is also possible, it’s important to realize that each individual needs to do the math to determine whether the money they pay their collectors — plus interest — outweighs the value they’d get if they had just invested it. As financial experts point out, this depends on things like how much interest you make from investing, how much your creditors are charging you and a range of other factors.
Why Pay Down Debt First?
Paying down debt before trying to invest for retirement may be your smartest option. Consider the fact that only one out of every three Americans had retirement savings as of 2016, and the picture starts to look a bit clearer. For most people, saving isn’t an option because the amount of liabilities they owe makes it almost impossible to build up useful momentum.
Living with substantial debt means that your retirement saving potential gets sapped by fees, interest, penalties, and possible litigation. What’s even more troubling is the fact that such problems overwhelmingly affect the poorest Americans. Higher-income individuals have more than enough extra cash lying around to invest, but those who aren’t as well off may find themselves trapped in spirals of debt that make it extremely hard to get anywhere useful.
Paying down debt can help you lower your recurring bills so that you actually have the option of saving intelligently. By making it less likely that you’ll have to consider your financial stresses every time you decide to do something, it can improve your freedom to choose alternative investment strategies that might pay out in the long run.
Start Paying Down Your Debt
Paying down your debt may seem like a tall order, but working with a reputable partner is the easiest way to get things moving in the right direction. Christian Debt Counselors offers a range of services including debt consolidation and debt settlement to give you more options for planning out your future. We care about helping you create a clear vision that works for you, so chat with our knowledgeable team members to get started today.