Should I be paying off debt or saving for retirement? There are a number of answers that I could give you to this question. The most simplistic answer is yes. Should you be paying off debt? Yes. Should you also be saving for retirement? Yes. And I’ll give you a little overview of what type of debt I am talking about versus saving for retirement. You need to be doing both simultaneously. That is the key to a successful long-term financial plan.
How do you do that? Let’s define the levels of debt.
The most insidious, in my terminology of debt, is short-term debt, which is basically credit card debt and payment plans for purchases. Those very short-term debts, where you’re paying an extremely high interest rate. If you even know what interest rates you’re paying! The companies that are encouraging you to go into that debt, of course, their goal is to keep you on as a long-term customer and never pay that short-term debt off. That entraps more people than any other type of debt.
A mid-term debt would be something like a home improvement loan, which you’re going to pay off in 2-5 years, typically. Or a car note. Most people will buy a 3-6 year or, hopefully, a 3 or 4 year car note and not go higher than that. Or simply, if you have cash, that’s the best thing to do. Most people can’t afford to do that in this day and age.
The long-term debt is totally different. For decades, the American Dream has been home ownership. I know of very few people who can afford to go out and pay cash for a nice house. That’s why we have the mortgage industry…where you can take a 15 or 30-year note and take your time, hopefully at a low interest rate. There’s nothing wrong with incurring that debt, but your goal should be, as quickly as you can, to pay that down.
You need to attack the short-term debt. There’s really no sound financial plan that involves continuous coverage of short-term debt. High interest rates. Pay it down. The value, emotionally, of paying down that short-term debt … I cannot tell you how important that is. That will free up more money to keep adding to your retirement plan. Whether you're doing it yourself as a self-employed with either, maybe, a SIMPLE or a SEP IRA or you’re fortunate enough to have an employer sponsored plan 401K or 403B, depending on where your workplace is. You need to do both.
When you get that short-term debt paid off, celebrate! Cut up the cards! Vow to yourself, keep the discipline away from that! Unless it's an emergency, and then we would be talking with you about an emergency fund to be put in place for your plan, so you won’t even have to worry about knocking out the short-term debt.
Again, our value as an advisor to you is to sit down, go through your current financial picture, point out those hidden obstacles, which, for many of you, is short-term debt, and combine that with increasing the savings in your retirement plan, and you can accomplish a lot. Believe me, with discipline and our help to keep you in check and keep you going on the road, you can do this!