(Pictured: Young women not yet crushed by the weight of their loans.)
Should I focus on paying down debt or saving for the future? If I had a nickel for every time someone asked me this question I'd have like...so many nickels. I totally understand. Our world today stresses the importance of saving for retirement and our future, but we're also buried in student loan and consumer debt. What can we do other than ignore it and hope the magical debt fairy comes and wipes our slate clean?
My answer? It depends. Gahhh I know how frustrating that response is. Wait! Keep reading! You'll have an answer by the end of this article. "It depends" is what I'm saying now because every debt situation is different and not all debt is created equal.
To find out if you should focus on paying down your debt or putting money away for the future, let's answer a few questions first:
What kind of debt do you have?
Student loans and mortgages are generally considered "good debt" because they are investments in your future. Student loans paid for your education will which hopefully increase your earning potential and a mortgage is paying for your house which is hopefully appreciating in value. Credit cards, personal loans, and any other form of high-interest unsecured debt is considered "bad debt" because it's doing nothing for you except creating a weight on your heart and mind and preventing you from building long-term wealth.
If you have "bad debt", you really want to make it a priority to rid yourself of it. Get rid of it, get rid of it, get rid of it. Throw every extra penny you have at this monster. When you finally pay it off, avoid falling into the traps and pitfalls that put you in that kind of debt before.
If you have "good debt", you still want to rid yourself of it, but you might have some wiggle room to really focus on putting away the dough for retirement as well. It won't be easy, but with a plan you can make it happen.
What are your interest rates?
If your interest rates are higher than your expected investment return rate, you are losing money. Simple math. With higher interest rates, it's in your best interest to pay them off first and then focus on saving and investing after.
If your interest rates are low, you might be able to earn more by investing and thus should pay down your debt but continue to invest.
Do you have an emergency fund set up?
It does not matter what kind of debt you have, you NEED an emergency fund. If you can't afford to sock away 3-6 month of living expenses for a rainy day, start with a small goal of $500. Then bump it up to $1000. Eventually fund it fully. Five hundred dollars might not cover an entire emergency, but it will provide a small cushion and relief. It's $500 less you have to put on a credit card or take out in a loan.
Don't leave free money on the table!
If your company offers a match, you must contribute enough to the retirement plan to qualify for the match. I don't care if you have debt or not, if your company offers a match, make sure you're contributing enough to get it. Don't you dare leave free money on the table. With the rest of your salary, focus on paying down your liabilities.
One last thing...
I know it isn't easy to balance the needs of the present and the pressure of the future. That's why it's important to have clearly defined goals and a well thought out financial plan to achieve them. If you've never had a financial plan, but aren't sure you can afford to pay to work with a planner right now, check out my ebook which will help you get started!