Many clients question whether they should pay down their debt, or start saving for retirement. Sometimes, the answer is straight forward, especially when they have high interest consumer debt or student loans. Often,there are are other things to consider before making this decision.
The most common way to decide is to consider whether you can earn a higher after tax return by investing as opposed to the after tax interest rate you would pay on the debt. For example, someone with an 18% interest rate on their credit card balance could earn an 18% return on their money by simply paying off the high interest balance.
If a client has an employer that offers a 401K match, the analysis gets more complicated. If they have a 50% match on the first 6% of their contribution, and they contribute $10,000, they could earn $5,000 on their $10,000 investment, which generates a 50% return. In addition, the money would be tax-deferred, and would lower your income taxes, so the benefits of saving in this case make much more sense.
Sometimes, an automatic deduction from your paycheck makes it easier to save since this eliminates the temptation to spend which could make your debt situation even worse. It is important to come up with a strategy that addresses both of these issues. Please contact me if you would like to schedule some time to get your finances back on track.