What’s best: paying off debt or saving for retirement?



If you have debt, you’ve probably heard time and time again how important it is to pay it off. Yet you may also be hoping to save money for your future.

Both goals are important, and both can have an effect on your financial security at retirement. But should you focus extra effort on one option or the other?

Everyone’s situation is different — but here are a few things to think about as you weigh your choices:

Advantages of paying off debt:

You can schedule automatic transfers from your checking account to your debt, to help prevent missing payments or spending the money elsewhere. Also, the return that comes from eliminating high-interest-rate debt is a sure thing. Potential drawbacks: If you work only toward paying off debt, and don’t save anything, you lose valuable time in compounding your returns over the long-term.

Advantages of saving toward retirement:

  1.  You can have funds automatically deducted from your paycheck, and deposited directly to your retirement account so you won’t be tempted to spend the money. 
    Potential drawbacks: Your retirement investment may or may not have a good chance of returning more to you, versus the amount of interest you’re paying on your debt. Investment returns are never guaranteed.
  2. You can borrow funds from some retirement accounts, as a last resort in case of an emergency. 
    Potential drawbacks: There may be strict parameters on how much you can borrow, and how quickly you need to pay this type of loan back.
  3. “Hardship withdrawals” may also be allowed for special circumstances, such as to prevent eviction or foreclosure.
    Potential drawbacks: Hardship withdrawals are taxed as income, and if you’re not at least 59 ½ years old, you may also incur a penalty for early withdrawal.
  4.  Your employer may match at least a portion of your contributions, giving you greater certainty about the returns you’ll earn. And contributions are pre-tax so your money goes to work for you right away.

Consider a Blended Approach.

Many financial experts agree that a blended approach may be best in most cases. By working toward both goals, if you can afford to do so, you’ll get the advantages of both options — and ideally, you’ll be saving enough to at least qualify for any employer matching that may be available to you.

For specific guidance on financial planning, contact Horizon Bank at 888-873-2640. Our experts, along with your accountant, can help you weigh tax benefits, potential investment returns, and more. So you can create a plan for 2016 that works to help you achieve short- and long-term goals alike!