Steps to Pay off Debt and Save for Retirement
This post was contributed to Leisure Freak by attorney Camron Hoorfar who specializes in issues of debt.
The current uncertain economic situation is making many Americans rethink their finances. The figures about consumer debt are a concern for many people. So, if you are thinking about paying off debt and saving for your retirement, you are not alone.
The ideal approach is to look for ways to settle your debts and focus on a savings plan. You can then use the savings for investments to create a source of income when your paycheck stops rolling in after your retirement.
So, here is a step-by-step guide you can follow to pay off your debt and save a substantial amount for your retirement. We have divided it into two parts, wherein the first one focuses on bringing down debt while the other one tells how to increase your savings.
Ways to Reduce your Debt Burden
Debt reduction and retirement savings are connected. Unless you settle your debts, you will not have enough money to save for your retirement plan. Therefore, the first thing you need to do is pay off your debt. Here are some ways through which you can achieve the goal of reducing your debt.
Pay off Expensive Debt First
Firstly, list down all the debts with a high-interest rate, such as credit card debt or student loans. It is vital to understand that not all debt is bad. If you have a mortgage or a car loan, it is eventually contributing towards your retirement savings.
However, debts with high-interest loans will quickly drain your finances.
Therefore, your priority needs to be increasing payments to get rid of those debts quickly. Once you clear out all your high-interest loans, you can divert those funds towards an investment plan to have a significant amount when you retire.
Create an Emergency Fund
Emergency funds are essential in case you have to deal with an unforeseen expenditure. There is no saying when you have an urgent bill or medical expense to deal with.
If you don’t have a pool of resources available to deal with it, you will have to turn towards high-interest loans, which can further plunge you into more debt.
But with a backup plan, you can effectively deal with the expense without taking on more debt. The ideal amount in an emergency fund should cover around 6 to 9 months of your basic expenses. Also, it needs to be as good as cash since you will need quick access to the money.
Revise your Budget to Cut Down Expenses
Updating your budget can primarily help you reduce your debt, but it can help in also increasing your retirement savings. You can kill two birds with one stone if you can revise your budget and look for ways to bring down your expenses. By doing so, you will have extra cash in hand.
You can use it to pay off your high-interest debt, or if you want, you can add it to your retirement savings as well. If you don’t have a monthly budget, then it is high time you create one to find out how much you are making, spending, saving, or investing. If you already have a budget, you need to revise it.
Also, when creating a budget, you need to consider a debt reduction plan and a savings plan. You need to allocate some money for both of them, so it will be easy for you to maintain a balance in saving and paying off debt.
Ways to Increase your Savings for Retirement
Now that you know about the steps to reduce your debt, you can use the saved money and channel it towards your retirement plan. Here is how you can increase your savings in 3 easy ways.
Take upon a Side Hustle
If you have the time and energy, it is better to invest those valuable resources in creating a new income stream. With the extra cash in hand, you can save it up and use it for your retirement plans.
Although it will be challenging and tiring to take up a second job or a side gig, it is still better than being in debt or with no money in your retirement. The extra pool of resources can help you build an emergency fund sooner.
You can also use the extra cash to pay off your debt. However, it will be best to save it rather than spend it on anything else. In addition, taking a side job gives you the advantage of stretching out your working life and getting health insurance to cover the time to your Medicare age.
Set Incremental Saving Goals
It is best to go for an incremental strategy by setting small targets for your saving plan. You can’t save all the money in the short run if you plan to have a substantial amount in your hand upon retirement.
So, it is better to set achievable saving goals and duration to achieve them. It will not burden you too much and will give you a plan on how to proceed with your savings.
Take Advantage of your Employer’s Contribution in Retirement Planning
The best way to save up more money without any hassle is by contributing more towards your retirement plan. If you have a 401(k) or 403(b), your employer will give you the same amount you are saving.
So, if you are saving up to 10% of your income, the employer will match it by giving the exact figure.
You should work towards raising the proportion of contribution to retirement savings. You can take advantage of it till you’ve reached your employer’s optimum defined contribution plan. Also, check the duration of the time before your employer can vest into your retirement plans.
In a Nutshell
By following these easy steps, you can settle your debts in no time and have an ample amount of money for your retirement. To summarize, all you need to do is pay off the expensive loans first. Next, you need to use the saved up money to invest in your retirement plans.
You can always take the help of financial advisors if you are not sure where to begin from. These advisors analyze your situation and give you a pathway to reduce your debt and increase savings for your retirement.
Much thanks to Camron Hoorfar for sharing his steps to pay off debt and save for retirement.
About the Author:
Camron Hoorfar is a licensed attorney with vast experience in consumer debt, litigation, bankruptcy, tax, business laws, criminal laws, and non-profit organizations. He is also the spokesperson of DebtConsolidationCare – the Internet’s first get out of debt community.
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