Do you think it is wise to consolidate debt first over other financial goals like saving for retirement? Experts would warn debt-ridden consumers about the dangers of delaying their retirement savings. But it seems like those who are struggling with debts are not hesitating to delay saving for the future if it means they will get there without debts. In fact, one survey revealed that one of the top three reasons why people don’t have enough retirement savings is because they prioritized paying off their debts.
The truth is, both your debts and retirement savings are equally important. There is really no competition. If you can financially afford it, you have to make sure that both of these have a room in your monthly budget. Failing to do so will have a negative effect on your financial future.
Of course, paying for your debts and saving for retirement is not easy for some people. There are those who have limited resources – especially young adults who have yet to find a full-time job. Their huge student loans have forced them to use their credit cards for basic necessities. This made their already fragile financial situation worse. Even if they find a steady job, it will still be difficult to feel secure about their finances. This is probably why some of them do not have problems delaying their retirement savings.
When is it okay to consolidate debt first before saving
If you think about it, consolidating debt first is not really a bad idea. Some people may not agree but there are instances when it is acceptable to deal with your debts before you start saving for your future. Here are three valid reasons to opt for debt consolidation first before you save for retirement.
If you are still young
If you are fresh out of college, do not be too hard on yourself if you cannot pay for your debts and save for retirement at the same time. It is true that starting early will benefit your retirement funds greatly. However, if it will cause you a lot of stress in the process, it may not be worth it.
Of course, you need to set a limit. Although you are young, time is still of the essence. You can opt to consolidate debt first but give yourself a deadline. Make a commitment to start saving for retirement in your mid-20s – regardless if you have completely paid off your debts or not. That should give you a couple of years to focus on your debts.
If you have mostly high-interest debts
It is also a good idea to consolidate debts first if most of them have high-interest rates. This usually means you have a lot of credit card debts. Sometimes, prioritizing the high-interest credit card debts will save you more money in the future. It will lower the interest amount that you pay for the entirety of the debt.
In fact, if you calculate it, the high-interest might even cancel out the compound interest that you would have earned in your retirement fund. If this is the case, then it is better to get rid of your high-interest rate debts first before you start saving.
If you have a short-repayment plan
Finally, it also makes sense to consolidate debt first if you have chosen a shorter repayment period. This means you will be out of debt in a couple of years. You can sacrifice your retirement savings for as long as it will not take 5 years or more. Just make sure that you will stick to the repayment plan so you can really achieve debt freedom in a short amount of time.
Once you have paid off your debts, you have to be more cautious of how you use credit. Never put yourself in the same position again. As you get older, the need to save for retirement will be greater. If you land in another tough debt situation, you might not have a choice but to split your limited resources between your debt payments and retirement savings. That can really make you feel stressed.
Tips to consolidate debt and save for retirement
Experts are actually worried about the number of US adults delaying their retirement savings for a decade. At least, they wait for a decade or so into their careers before saving for retirement. If you postpone saving for retirement, there is a possibility that it will do a lot of damage to your financial future. But if you act quickly, then it might not be too late for you to reverse any negative effects.
And if you think about it, you do not have to skip your retirement savings just so you can consolidate debt first. It will take a lot of self-control and discipline but it is possible to do both. Here are tips that will help you accomplish this.
Earn more and secure your source of income
If you cannot afford to pay off your debts and save for retirement, an obvious solution to that is to earn more money. You can start by looking at your current source of income. See how you can increase it. Is it possible to ask your employer for a raise? Or maybe you can get extra shifts? If not, then you may have to look for a side gig that can increase your monthly income. If you earn more, you can fund both without a problem.
Lower your discretionary spending
If you cannot increase your income, you can at least lower your spending. This will immediately help you get the funds that you need to pay for both your debts and retirement fund. You can review your budget and consider the expenses that you do not need. Since the debt payments are not forever, you can remove some of the expenses temporarily.
Get a debt consolidation program with low monthly payments
Even if you have to consolidate debt first, you can always choose a strategy that will allow you to make lower monthly payments. This means having a longer repayment period. But that is okay as long as it will allow you to free some funds to contribute towards your retirement. Stick to your debt consolidation program. Once you complete it, any of the extra money that is freed can be put towards your retirement funds – or another financial goal.