The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
The content below has been provided by our partner, Raymond James Financial Services Advisors, Inc.
Where Should Your Next Dollar Go?
If you feel like you’re being pulled in a multitude of directions financially, you’re not alone. Today, the average U.S. household has $8,398 in credit card debt1 while the average college graduate owes $31,172 in student loans.2 Meanwhile, most American workers are largely responsible for their own retirement as Social Security becomes increasingly less reliable and corporate pension plans turn into a distant memory.
It’s not surprising that so many Americans feel unprepared for the future, citing their present financial responsibilities as the culprit.3 At the same time, most people don’t know the best way to attack the problem, wondering if it’s better to pay down debt today or start saving for the future.
In this article, we examine this common dilemma in more depth and provide a road map for success.
Feed Your Emergency Fund
If you don’t already have an emergency or “rainy day” fund, establishing one is an important first step toward taking control of your finances. An emergency fund helps you avoid racking up credit card debt if you have unexpected medical expenses, your car breaks down, or you lose your primary source of income. A good rule of thumb is to have two to three months’ living expenses set aside for such unanticipated events.
Set Aside Money for Future You
Depending on your income and potential debt situation, making the maximum allowable contribution to tax-advantaged savings and investment account contributions may be a challenge, but it’s a good place to set the bar. Whether you have an employer-sponsored retirement plan, health savings account, individual retirement accounts, or all of the above, these have important tax deferral benefits and allow you to take full advantage of the power of compounding.
Consistency is also important – regular contributions can add up over time, so it’s a good idea to automate them if you can. And, the earlier you start, the less you need to contribute to meet your retirement goals.
Pay Down High-Interest Debt
Not all debt is bad. For example, paying off your mortgage over 30 years isn’t necessarily harmful to your financial situation or credit. On the other hand, carrying thousands of dollars in high-interest credit card debt month after month is bad for both.
If you have debt, first consider the source. Credit card debt, which generally comes with a high interest rate, should be paid down first and as quickly as possible. Mortgages, car payments and student loans can be paid off at a measured pace, as long as the interest rate isn’t meaningfully above average. Once bad debt is eliminated, you can redirect your payments to lower interest rate debt or your long-term savings accounts.
- Get a complete picture of your financial situation. When you’re deep in debt or don’t have much saved, looking at your finances can be overwhelming. However, you can’t improve your financial situation without understanding where you are now. Pulling together all of your relevant financial data will help you develop a better plan.
- Understand your employer benefits. With student loan debt on the rise, many employers are offering employees repayment assistance. Some companies match their employees’ student loan payments up to a certain amount, while others pledge to make an equal contribution to the employee’s retirement account. Not to mention, many employers offer to match your 401(k) contributions in some form. Review all the benefits available to you to avoid leaving free money on the table.
- Evaluate all of your options. Sometimes getting your finances back on track requires creative solutions. You can try to increase your income by asking for a raise or starting a “side hustle” job. Or you can find ways to cut back on large expenses, such as housing and transportation. If credit card debt is your issue, consider negotiating a lower interest rate or sticking to your debit card for purchases.
- Strike a balance that makes you comfortable. At the end of the day, you must be comfortable with the financial choices you make. If having debt keeps you up at night, you might want to pay it down completely before focusing on retirement. While everyone’s path to financial success is different, it’s important to balance your current obligations against your long-term needs to avoid finding yourself unprepared.