To pay off credit card debt or save for retirement? That is the question—today, perhaps more than ever.
U.S inflation is at a four decade high, and the Federal Reserve has increased interest rates to try to control it, leaving many Americans relying on credit to make ends meet—and then being saddled with hefty interest rates that make paying off this debt a Herculean effort.
And not just the usual hefty credit card interest rates: credit card interest rates have reached an all time high, creeping up over 24%.
This interest increase can leave many people who are looking to save money for retirement and who want to pay off debt—credit card or otherwise—feeling frustrated, confused, and hopeless.
But we’re here to help. If you’re wondering, “should I pay off debt or save for retirement” keep reading.
Here’s the thing: whether or not to pay off debt or save for retirement is a personal question, and it demands a personal answer.
That’s why when we asked our financial experts at ConsumerCoverage to weigh in, we didn’t get a standard solution across the board. However, we did get a wealth of information that should help you decide what answer is best for your mindset, your goals, and your financial situation.
Our experts in this camp have good points: when you have debt, you are spending money on paying down not only that debt, but the often substantial interest rate.
The argument here is that all debt is bad debt, and you should pay off your debts as soon as possible, usually starting with your debt with the highest interest rate and/or monthly payment. (Find out how to use a 0% balance transfer credit card to pay off higher interest credit card debt.)
“Debt is a weight that holds you back from reaching your financial goals,” says ConsumerCoverage CMO Adrian Lee. “Before you can soar towards a comfortable retirement, you must first shed the burden of high-interest credit card debt and other obligations. By focusing on paying down your debts first, you free yourself from the stress and limitations that debt can bring, and pave the way for a brighter financial future.”
This scorched-earth approach to debt includes annihilating debt for credit cards, loans, and even mortgages. It should all be gone (or mostly gone) before you start seriously saving.
For people with an all or nothing mentality, this option is almost unquestionably the best choice—especially if you have a lot of big, high-interest credit cards and loans.
The financial experts in this camp believe that while some debt can be bad, not all debt is created equal, so it may be in your best interest to begin investing substantially before you are debt-free.
“Time is money, and the earlier you invest in your retirement, the greater the potential for long-term gains,” says Hollay Ghadery, ConsumerCoverage’s VP of Communications. “While debt can be a burden, not all debt is created equal. Prioritizing retirement savings can help you harness the power of compound interest and build wealth over time. So pay yourself first, invest in your future, and let the magic of compounding work its wonders to help you achieve your financial goals.”
Let’s look at an example. You have a mortgage with a 3% interest rate. But there are certain stocks, like the ones in the S&P 500, that have a steady history of earning around 7% returns in the long-run (once you account for inflation), so why not pay yourself while you pay off your debt?
And that’s the thing: even our experts in the pay-yourself-first camp agree that you do need to be paying down your debt while you save, especially high-interest debt like credit card debt. You can’t just ignore it. And you do need to make sure you are able to make your payments on time.
However, it is equally important to save money, not only for retirement but–first and foremost–for emergencies. You never know when you’ll encounter unexpected expenses, like rent hikes, or car or health expenses. Most experts recommend having three to six months worth of living expenses tucked away and readily available (i.e. NOT invested) in case you need funds in a pinch. (10% of your paycheck is a good amount to start filing away for your emergency fund.)
After you are in a position where you are paying down debt every month and have that emergency fund established, then you can start seriously saving.
When entertaining questions of how to pay off debt before retirement, it is directly stated that paying off debt before retirement is the goal. And it really should be. You want to enter your retirement debt free, with many years of active and abundant savings backing you.
Even if you’re in debt at this moment–even if you’re in a lot of debt at this moment–you’re still on the right track toward a cushy retirement. After all, the very act of reading this article proves you’re trying to increase your financial literacy and pivot to make your dreams of a comfortable retirement a reality .
Learn about how you can use a credit card to help you pay off high interest credit card debt.
Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.
