When it comes to money, prioritizing what you should spend it on should always be the case. Most people, especially those between the ages 25-40, are usually carefree when it comes to money. Saving up for the future is not really a priority, and paying everything off with a credit card seems to always be in the books.
These days, saving up should always be your first priority when it comes to financial planning. However, if you have a huge pile of debt, then you might get confused as to which to prioritize: paying off your debts or saving up for the future? We weigh your options, and what you should do first.
Start by Building an Emergency Fund
You never know what’s going to happen next, and sudden emergencies may arise at the most unexpected time. Start by getting a small chunk of money from your salary every pay day and put it in a bank account that is meant for your emergency savings. The amount that you will be able to save up will likely make or break your retirement plans.
Debts Within the 5-7 Percent Interest Rate Must be Paid Immediately
Debts that are within the 5 percent interest is still safe. However, if it starts to go beyond 7 percent, then you would be better off if you pay it off first before thinking about investing in your savings. Debts that go beyond the 7 percent interest rate has a higher chance of getting a huge interest, which you do not want, especially if you are trying to be frugal. If the rate is still at 5 percent or below, then you will be better off investing your money for extra savings.
Borrowing from the Bank and Lending Companies
If you currently do not have money on hand and you are struggling to make it through, then your solution to the problem might be lending money and properties from lending companies and the bank. There is nothing wrong with this though, even if you have bad credit, as bad credit car finance and mortgage exist. However, when everything becomes easier and you get a new income, then paying off your debts in this situation is the wise thing to do. Huge debts from the bank can acquire a huge interest rate, and you definitely do not want to be buried deep in debt, especially when it comes to properties and dealing with the bank.
Save Up for a Home Down Payment
Having a house of your own is a actually a very good investment when it comes to your retirement. Applying for a mortgage can be a pretty big responsibility, and paying it off continuously until your retirement can be so much of a task. This can also be difficult as once you have already retired, your income won’t be that stable compared to when you were still working.
Minimize the Use of your Health Savings Account
Having a qualified and high-deductible health insurance plan can be a very good investment, especially for your retirement. You can even contribute to it while you are still young and working, during its pre-tax days. It would also be wiser to use the money tax-free for health care expenses. The amount that you won’t be able to use will automatically be carried over, and you have the option to invest it for long-term. If you reach the age of 65 and you haven’t used most of it, then lucky you, as it would have already grown without tax and can be withdrawn penalty-free. You can still use it before you are 65, especially when you have no other option but to turn to it. Remember, health is wealth.
Get Ready for Retirement
This is definitely one of the most important advice that we can give you. Prepare for retirement and start with tax-advantaged accounts such as a 401(k) and IRAs. This will make it easier for you to deal with debts in the future.
The question here can be answered depending on the situation. There are situations wherein paying your debt can be more beneficial to you, and there are some wherein saving can do you a lot of good. Just remember to heed our advice, and you will be well on your way to a better retirement plan.