No matter how much you make or what stage of life youâre in, youâre going to have to prioritize spending and saving. And when it comes to big financial goals, such as paying down debt or saving for retirement, itâs not always clear what to focus on first.
If you do have extra funds, how do you prioritize? The good news: It doesnât have to be an either-or question. Itâs all about finding a balance thatâs right for you. Hereâs how.
1. Review your budget to boost savings and trim debt.
Whenever you set up a budget, include line items for every expense and savings goal, including paying off debt and adding to retirement funds. Even if your contributions each month are minimal, youâre establishing good habits
Tip: Use a to help analyze where you spend and can save over the course of a month or two.
Review recent bills, plus bank and credit card statements to establish a baseline. Then adjust based on spending and saving goals. Think about how youâre really spending your time, recommends Stanley Poorman, a financial professional with PrincipalÂŽ, and you may come up with extra funds. For example, if youâre paying for several streaming services but only use one or two regularly, you may consider canceling the others.
2. Avoid unexpected debt by saving in an emergency fund.
If it would be difficult for you to cover unexpected expenses such as car repairs that require an immediate outlay of funds, make it a goal to build an emergency savings fund. Take it step by stepâfocus on saving just one month of income as a starting point. Add to it as youâre able.
Having an emergency fund can also help avoid or minimize what Heather Winston, a financial professional and director of individual solutions at Principal, calls âbadâ debt. â'Typically, âbad' debts are credit cards or things like payday loans,â she says. âThey charge higher interest rates and that can prevent you from getting ahead.â
âEmergency funds can be used for unexpected expenses rather than putting them on a credit card. While debt has a place, using it wisely may serve you better long term."
3. Save for retirement to get the maximum match from your employer.
Free money sounds like a great way to save, doesnât it? If you work for a company that offers a matching contribution on a 401(k) or 403(b) retirement plan, thatâs essentially what youâre getting.1
If you save 5%, for example, and your employer matches it, youâve instantly doubled your savings. That means $100 saved doubles to $200 saved without any extra budget maneuvering from you.
Work toward increasing the percentage youâre putting in that retirement fund until you at least reach the maximum matching contribution from your employer.
4. Set some debt-reduction goals that help you.
How much debt you have influences all sorts of decisions you make. For example, if youâre hoping to buy your first home or upgrade to a larger home, âcarrying too much debt relative to your income may hinder the loan rate you can get,â Poorman says. âPrioritizing debt repayment may help in achieving this goal.â
However, that doesnât mean you should put retirement savings on hold until you eliminate all debt. âMost of us have competing timeframes and goals, so itâs unrealistic to think that you can stop saving for retirement just to make your debt go away faster,â Poorman says. âThe key is to understand how long it will take to get to that manageable debt ratio and adjust your other priorities accordingly.â
âMost of us have competing timeframes and goals so itâs unrealistic to think you can stop saving for retirement just to make your debt go away faster.â
Stanley Poorman, financial professional
5. Tackle âexpensive debtâ first.
Just as there is bad debt, there may also be âgoodâ debt. âIf all you have are âgoodâ debts like car and mortgage payments, then you may be in good shape to build on your retirement savings,â Poorman says.
If not, make a list of all your debt obligations and their associated interest rates. Debt with a higher interest rateâ say, the typical credit cardâshould be a priority. âThe interest you pay may be higher than the return youâd earn on saving those same dollars,â he says.
Pay more than the monthly minimum if you can. Once you pay off the highest interest rate debt, move to the next loan on your list. When youâre all done? Consider putting that same amount that you allocated to debt repayment toward retirement savings.
6. Accelerate your long-term savings.
You donât have to be debt free to save more for retirement though. It depends on your individual priorities and goals. âItâs about finding the right balance between paying down debt versus saving,â Poorman says.
It can be overwhelming to compare how much you need to save for retirement to how much youâre able to save. Instead, consider small steps which will eventually get you to your goals.
Tip: Use the PrincipalÂŽ to see if youâre on track with your retirement goals.
âFor example, you can increase your retirement savings each year until youâre contributing at a level that gets you to your goal,â Poorman says. That small increase each year is unlikely to make a large dent in your monthly budget, but it will make a long-term positive impact on a more secure retirement.
7. Talk to a financial professional.
To plan for your future, itâs helpful to know where you stand financially. If youâre overwhelmed, ask for help. A financial professional will talk you through your options. Donât have one? Check with your HR department or employer to see if your companyâs retirement savings plan offers this service. Or, we can help you find one.
Next steps
Is debt affecting your ability to save for future goals, like retirement? to see how youâre doing. Donât have an employer-sponsored retirement account or want to save even more in addition to a 401(k)? We can help you set up your own IRA or Roth IRA. Ready to continue building your financial foundation? Our learning library has information on everything from building a budget to buying a home.
