It is mostly a fight between the mind and heart when it comes to deciding which one to do first! Pay off debts, or invest for retirement?
The scenario is no doubt complex, and you have to figure out the things completely on your own. This might sound a bit demeaning but in the end it is really up to you.
The mind wants to pay off debts, while the heart wants to invest for your retirement, so that you can spend the golden days in absolute bliss.
But, all I can say is you go through this post in full detail, as it will definitely help you to make appropriate decisions!
Paying off debts is important, as you can’t see your net worth increase if you are surrounded by debts. Plus, if the debts are consumer or household debts and you can’t clear them soon, then the heavy interests can actually pin you down forever!
On the other hand, quite often, the interest return on investments exceeds the interest rate of the typical debts you have.
This makes the game more tough to play, as doing investments can give you more prospect than the only mental peace of getting your debts cleared.
However, it mostly depends on what type of debts you have, and what type of investments you are aiming to do.
What type of debts need to be cleared first:
You must have guessed it by now. High interest debts need to get down off your shoulder as fast as possible.
- Payday Loans:
These are counted as probably the highest interest rate carrying loans ever. There are several instances where people actually have to pay nearly 300% of the original amount as interests only.
So, if you are having a debt profile where you are suffering from payday loans, then forget about retirement for the time being, and you have the full authority to concentrate on clearing these payday loans.
If possible try to make extra payments on these debts to wipe them faster.
- Credit cards:
This is something that we all have. Credit cards are at times considered to be the most lethal of all debts. That’s because of the high outstanding balances, they carry.
Their interest rates can be significantly lower than the payday loans, but given the high balances, they are really difficult to pay off.
Therefore, if you are having multiple credit cards with you, then you can totally take your time to deal with them, as the emotional toll of credit card debt is huge.
- Other high interest personal loans:
There are many who take out personal loans for various purposes. And, the interest rates on these loans are somewhat similar to credit cards.
So, you can pretty well say that they have the same priority status as of credit cards.
Hence, it’s better that you wipe out these loans pretty fast too.
- Home Equity Credit Lines:
If you have been playing games with your equity, then you have really went pretty deep.
You really need to cut down these debts. This is like risking your investments by attaching debts to it. Also, it can get worse , if your mortgage is not yet cleared outright.
Thus, Home Equity Line Of Credit, and/or a Home Equity Loan should be your biggest priority to pay off, before you hit retirement investments and savings.
In what ways can you pay off your debts faster?
When all you are having on your mind, are retirement savings and investments, and if you really want to start with them soon, then debt settlement is the best among all the options for debt relief.
If you can take help of any debt settlement company, then you can get heavy deductions on your debts amount. Also, the settlement company will be asking you to save up a lump sum amount, by giving you a time span of 4 to 5 months.
The amount you will save will be based on the amount negotiated by the company with your creditors. Old debts have a higher chance of getting settled than newer debts. So, it’s better that you consult a debt settlement company right away to know stuff in more detail.
You can also choose to do Credit Card Balance Transfer:
For multiple credit card debts, you should opt for credit card balance transfer. You take out a new balance transfer card, and transfer all of your existing card balances onto this one, and have only one interest rate for the total debt amount.
It is expected that you will get a 0% APR introductory period, where you will be forgiven of all interest fees.
Last but not the least your investment options, will regulate the decisions:
Investing in stock market is something, while an employer sponsored 401(k) or a Roth IRA is something else.
On the other hand, a certificate of deposit is also a nice investment strategy. They all have their unique rates of return, and they all are important in the end.
But, it is better to pay off your debts first, rather than investing in stock markets.
Again, investing in your 401(k) is far more profitable than using the cash for paying off low interest debts.
Hope, you are understanding the situation.
But, I will still say that you should not hold on to any type of consumer debt for long. And, it totally makes no point to drag your debts into your retirement days.
Believe you will make your decisions quite sensibly.