If you have existing debt like credit cards or student loans, you may wonder if you should pay it off or save for retirement. While everyone’s financial situation is different, many experts recommend doing both at the same time. Here’s one approach to consider:
Find money in your budget
- Look for expenses you can reduce or eliminate to save and pay off debt. Use our budgeting tips and worksheet to get started. Consider optional costs you can cut back on, from streaming services to dining out.
- Calculate the total you can reduce your expenses by. If you shave $200 total from your monthly expenses, that’s $200 you can apply toward saving and debt.
Take one step at a time
- Consider building an emergency fund first. That can keep you from going further into debt if unexpected expenses occur. Initially, you might put most of your savings into an emergency fund. Keep doing so until you have enough to cover 3-6 months of expenses.
- Contribute to your employer-sponsored retirement plan at the same time, even if you start small. The sooner you begin, the more you benefit from compounding — your earnings being reinvested to generate more earnings — which boosts your savings with less out-of-pocket money. If your employer offers to match contributions up to a certain amount, that’s another reason to begin investing.
- Once you’ve set up an emergency fund and started your retirement contributions, focus on paying off debts. Prioritize those with the highest interest rates to pay off debt fastest and save the most on borrowing fees. Tackle smaller ones first if you’re motivated by seeing quick results. Either way, as you pay off each debt, use the amount you’d been paying on it toward another one.
Once you’re out of debt, you can decide what to do with the extra cash — and face the future more confident in your finances.