Reduce Your Debt Level to Save for Retirement

reduce debt level

These days, post-Christmas shopping-about to open the credit card bills, it’s easy to find a reason to put off saving for your retirement.  Rather than ignore the fact than paying off your debt is important, I’ll agree with you.  The sooner you pay off your short-term debt, the easier it will be to save for a long-term goal: Take Your Retirement!

Short-term vs. Long-term Debt

There are many types of tools used to borrow money: credit cards, lines of credit, bank loans, mortgages, etc.  Each of these tools should be used in certain situations.  Short-term needs like gas for the car, groceries for the week, etc. can be purchased with a credit card as long as the bill is paid in full on or before the due date.  Emergencies such as a lack of funds before pay day, an urgent car repair, (heaven forbid) a credit card bill after the holidays can be handled by your line of credit.  Be sure to pay back the capital borrowed as soon as you have received your income.  Long-term debts such as a bank loan, car loan, mortgage tend to finance items that last longer: your home, vehicle, a renovation, etc.

An effective method to free up cash to save for your retirement is to reduce, even eliminate, interest paid to financial institutions for money you have borrowed.

Compare Loan Interest Paid to $$$ Saved for Retirement

On a monthly basis, keep track of how much you give to the credit card company and your bank in Interest payments.  Remember, the only advantage you have received for this expense is to have access to spend the cash before you received it.  This privilege makes sense when you are building ownership in a tangible lasting asset such as a house or vehicle.  It makes much less financial sense when the $$$ is borrowed for consumption, think about a vacation put on a credit card and not paid in full upon your return!  Even with a credit card with a low APR of 2.90%, a $1000 vacation will take 7 years to pay back and cost around $500 in interest, if only the minimum payment schedule is followed.

If you manage your debts effectively and pay off short-term debts, you can add the $500 to your retirement savings plan!

Pay Yourself First

Many people need help with ‘pay yourself first’ savings programs.  Once you have eliminated interest paid on short-term debt, start small by setting money aside before it gets spent.  Many financial institutions have ways to transfer $$$ to a savings account automatically. Start by setting up a separate, dedicated savings account, preferably one that pays a higher interest rate, and an automatic saving program with a small amount each week from your pay cheque.  Once you are comfortable that the money is not required for living expenses, use the savings to contribute to your retirement plan. This method can go a long way in helping you reach your savings goals.

How does this sound to you? If you haven’t started this approach yet, what are you waiting for?  Let us know if we can help you take this important step.

Author: Robert

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