Pay Down Debt or Save for Retirement?

When it comes to personal finance, one of the biggest questions you must answer is whether you are going to pay down your debt or save for retirement. In the perfect world, you wouldn’t have any debt to pay down — but that is rarely the case in the real world.

Credit Cards (Image: Flickr)

Your answer to that question depends on multiple factors. The main factor is how long you have to left before retirement. If retirement is 20 to 30 years away, paying off your debt to get debt-free is almost always the way to go. In the long haul, you’ll save money on the interest fees because the interest you pay on your debt will almost always be more than the interest you receive when investing.

However, if retirement is creeping up quickly, a better idea may be to do both at the same time. Set up a budget that has you taking some of your income and splitting it between debt and building a retirement nest egg. Not only does this allow you to kill two birds with one stone, it also will get you in the good habit of budgeting wisely.

The only reason why you should save for retirement over paying down your debt is if it makes financial sense. For example, if you have a loan that doesn’t have any interest attached to it and you have a 401 (k) that matches what you put into it, that’s a scenario in which you should skip the debt and save for retirement.