The importance of saving for retirement cannot be overstated. In an ideal world, everyone would have more than enough money to sock away some each month to ensure that they can maintain their lifestyle, once they are no longer working. In reality, however, life just isn’t that simple. After paying for day-to-day living expenses, most people have a small amount of money remaining and are forced to choose between paying down debt or investing for the future. But how do you know which is more important?
is no set rule of thumb for whether it is wiser to focus more on paying down
debt versus saving for the future. And the best route for you will depend on
your own personal circumstances. There are, however, several things to keep in
mind when deciding which approach makes the most sense for you:
Before allocating any of your disposable income to savings
or paying down debt, make sure that you have built up an emergency fund large
enough to enable you to cover your day-to-day living expenses in the event of
any unforeseen circumstances–such as the loss of a job, a serious illness, or
even the death of a spouse. Financial advisors suggest squirreling away the
equivalent of six months of salary to provide yourself with enough padding to
get back on your feet in the event of any such situation.
It is always a good idea to eliminate credit card debt as
quickly as possible, as failing to do so can leave you paying multiple times
the amount of the money you initially borrowed from a credit card lender and
could leave you repaying that debt for years to come. According to
creditcards.com, as of November 20, 2019, the average credit card interest rate
was 17.21%, which is actually one of the lowest points for interest rates over
the past 12 months. Comparatively, between 1926 and 2018 the average
(investment) return of the S&P 500 Index was just shy of 8%, according to
While eliminating mortgage payments or student loans may be
attractive, don’t forget to consider the impact of losing the mortgage interest
deduction when it comes to paying your federal taxes. If you can earn more
money through a conservative, low-risk investment such as municipal bonds than
you will save by eliminating your mortgage payments, it may not make sense to
expedite repayment of your loan.
If your company offers a 401(k) plan and any sort of
matching incentive, the best thing you can do is to allocate at least the
minimum amount to your portfolio that your company will match. Otherwise you
are just leaving money on the table.
These are just some of the factors that you
should consider when it comes to paying off debt versus investing for the
future. Depending on how much debt you have, or what kinds of assets you have,
you may want to consider speaking with a financial advisor to help determine
the best approach for your individual circumstances. Please let us know at Alpine Bank if
we can help you.