The hardest part of personal finance is that it is personal. A solution that is one size fits all does not exist; each and every single one of us is different. Add on top of that the possibility that there can be multiple right answers for each person and you can quickly see why managing your money can seem so overwhelming.
Let’s take one of the most commonly argued questions and find the right answer for you.
Should I pay off debt or save for retirement?
First let’s look at the positives of doing each of these items right now:
Pay off Debt: frees up dollars in your budget for other things and makes it easier to manage emergencies when you have extra cash to handle them. When the debt is gone, you are have more of your income to put to use creating your sound financial future.
Save for Retirement: the power of compounding and starting early allows you to have to save less money in the long run, and it is important to be able to provide for yourself in retirement more so than ever before. (Saving for retirement in a broken retirement system).
No one can argue that there are benefits to paying off debt or saving for retirement. What you can argue is when you should do each one, so following is the order that I recommend based on your life situation.
If you have the budget to do both pay off debt and save, then this is definitely the way to go. Even if you are only saving a small amount for retirement and are focusing the remainder of the money on paying off your debt; at least you are working towards having a stable retirement. The benefits of early retirement savings are so valuable it is important to strike some balance between debt pay off and saving.
If you don’t have enough to tackle both at once and make progress then I recommend paying off credit card debt first. Credit card debt has the highest interest rate and typically can free up the most money from your budget. Once your credit card debt is eliminated then reevaluate to see if you can do both save for retirement and continue to tackle the remaining debt.
If you are still tight on the budget, tackle the car payments next. Cars are depreciating assets and getting an auto loan is typically a bad plan. Freeing up those large payments should get you to a place where you can save for retirement.
Keep eliminating debt until enough room has been freed up to begin retirement savings. However, don’t wait too long for this, if you are continually pushing back retirement savings do a reality check and figure out why even when you are paying off debt you are still struggling to save money for retirement. Ultimately you want to move to retirement savings as soon as possible.
Pay close attention to your budget and progress as you are going through this process, especially when money is tight. The more you monitor it and pay close attention, the more you can handle the details that get you to solid financial ground.
While this is still not the perfect answer on what you should do first, it should give you some ideas on how to determine what is right for you. Remember personal finance is personal, so learn as much as you can and then make an educated decision for you.