Debt vs. Savings vs. Retirement
In a perfect world, everyone would have enough money to pay off all their debts, build a savings fund for emergencies and fund a comfortable retirement. But in the real world, people must prioritize their funds. Putting your limited money where it will do the most good helps you make the most of what you have available.
Other People Are Reading
-
Paying Off Debt Yields Dividends
-
If you are carrying high levels of credit card debt, paying down that debt should be a financial priority, especially if that debt has a high interest rate. If you pay off a credit card with a balance of 18 percent, you essentially get a risk-free yield of 18 percent on the money you put toward those payments. Since a risk-free return of 18 percent is impossible to achieve anywhere else in the investment world, paying debt is the best thing you can do with your money. Of course this strategy only works if you are able to get a handle on your spending and do not rack up any more credit card debt.
Emergency Fund
-
After you get your high-interest debt under control and start to pay it down, your next priority should be to build an emergency fund. It is important to save for retirement, of course, but it is also important to prepare for today with a solid emergency fund. Experts recommend that workers have an emergency fund equal to at least six to nine months' worth of living expenses. If your company has been going through layoffs or is in bad financial shape, having a bigger emergency fund is a great way to be prepared for the unexpected.
Saving for Retirement
-
Saving for retirement is essential in the modern world. Companies have been cutting back on traditional defined benefit pension plans for years now, and that trend is not expected to reverse itself any time soon. Saving for retirement also has tax benefits, and putting money into a 401(k) or 403(b) can lower your taxable income substantially. If your company offers matching funds on its 401(k) or 403(b), it makes sense to put in at least enough to get the full match, even as you use your extra money to pay down debt and build up your emergency fund.
Living Within Your Means
-
No matter where you are on the debt/savings/retirement cycle, the key to achieving your goals is to live within your means and spend less than you make. No matter how much money you make, if you spend more than that you will always be in debt. The first step toward living within your means is to build a comprehensive budget. Once you see where your money is going, you can look for ways to cut back and find money to pay down debt, build up your savings and start a retirement fund.
-
