Ways to become debt-free while saving for retirement

By WP BrandStudio

You’ve settled into your career and have a little extra money in your pocket. What do you do with it? Should you knock out your debt or save for retirement?

The good news is that it doesn’t have to be an either-or question. It’s all about finding a balance. Here are five strategies for addressing both of these long-term financial goals.

1. Examine your earnings and expenses

“It all comes down to cash flow,” says Don Hammond, a Principal financial advisor in Sheboygan, Wisconsin. “Figure out how much you have coming in versus what’s going out and adjust so you have money for retirement and paying off debt.”

Use a household budget worksheet (PDF) to help free up money each month to put toward debt reduction and/or savings. Look at recent bills, plus bank and credit card statements, to gain greater insight about your expenses.

Of course, more income helps. Many people have a side job to earn extra money. Maybe you can be a math tutor, make earrings for the local art fair or join the ranks of Uber drivers. Search for “side hustle ideas” to get started.

2. Beef up savings

Try to keep long-term savings goals top-of-mind. “Building liquidity while paying down debt is helpful,” Hammond says.

It can also be smart to contribute to your retirement accounts while paying off that debt. If your employer offers a matching contribution on a 401(k) or 403(b) retirement plan, put away at least the minimum so you get the match. It’s sort of like free money, and it adds up.

Even a 1% bump in your retirement plan deferral can make a big difference over time.

3. Make debt reduction a priority

Start early and chip away at the amount you owe. “Don’t wait until a serious crisis to prioritize and pay down debt,” Hammond advises. Instead, aim to:

  • Make a list of debts from the highest interest rate to the lowest.
  • Pay off the highest-interest credit cards and loans first by paying more than the monthly minimum.
  • Continue to make at least minimum payments on the rest.

Once you’ve paid off a debt, consider putting that same monthly amount toward retirement savings—and pat yourself on the back while you’re at it.

4. Be cautious about credit

How you manage credit depends on your financial situation, Hammond says.

If you carry a credit card balance, be careful to avoid increasing it. “Just because you have a box of chocolates doesn’t mean you have to eat them all at once,” Hammond says. “If you’re in the hole, don’t keep digging. Work toward paying off your credit cards.”

If you’re essentially debt-free, you can continue to use credit—within reason, of course. Why? Because not using it may damage your long-established credit score and make it harder to get financing when you really need it. Hammond suggests charging a little bit each month and paying the balance in full each month. That’s the key part: paying in full.

5. Talk to a financial advisor

To plan for your future, you first need to know where you stand financially. Then, if you want assistance, contact a financial advisor for help with your personal finance strategy.

Next steps:

This content was supplied by Principal Financial Group and published by WP BrandStudio. The Washington Post newsroom was not involved in the creation of this content. 

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