Should You Pay Off Debt or Save for Retirement?

There are a handful of difficult decisions you’ll face during your financial journey. They might include buying versus renting a home, or leasing versus purchasing a vehicle. But one of the more challenging decisions you’ll face is determining to pay off debt or save for retirement. There are many different opinions on this specific topic and the “right” answer usually varies from person to person. The right answer for you will depend on your current financial situation along with other factors. With that being said, there are a few useful guidelines for you to consider which will help make the decision to save for the future or pay down debt a bit more clear.

Inventory Your Debts

When making the decision to pay off debt or save, take a good look at your debts and consider the amount of debt you’re currently carrying. You also want to track the interest rates of all your loans; credit cards, student loans, auto loans, personal loans, etc. While doing this, pay special attention to those with high interest rates, especially interest rates in the double-digit range. Even the most prudent “savers” should prioritize eliminating high-interest debt. Paying off these liabilities will allow for more flexibility with your finances. Less debt means less monthly payments, thus increasing your available spending money every month. That available money can then be used to pay other debts or be put towards savings and funding your retirement.

Establish an Emergency Savings Fund

This step is critical to any financial plan and while it’s not directly tied to paying down debt or saving for retirement, it has a big impact on both. If your car needs repairs, or you have a sudden loss of income, you could be relying on high-interest credit cards or a personal loan to get by. Both of those options prevent you from accomplishing your goals of becoming debt-free or saving for retirement. Establishing an emergency savings fund of three to six months’ worth of essential expenses is important to keep you on track financially no matter what life throws at you. This money shouldn’t be invested, it should be liquid, meaning the funds should be easily accessible in a checking or savings account, in case it’s needed quickly. Visit for a safe and sound place to securely keep your emergency funds. Once your emergency savings is built, you can then allocate money monthly to your retirement avenues or your high-interest debt.

Maximize the Match

Even with high-interest debts, if it is available to you, you should take advantage of any employer sponsored retirement plans such as a 401(k) or 403(b), especially if your employer offers matching. For example, your employer offers 4% matching and you make $1,000 a week. If you contribute 4% of your salary, or $40, your employer will do the same. Taking advantage of this match helps you add to your retirement account even faster than you can save on your own.  Not only does this allow an easy way to save, but the investment options usually net higher returns. Another big advantage is that it decreases your taxable income. These reasons are why most financial advisors recommend you continue with retirement contributions, or start them, despite having regular debt repayments. Even if you don’t have an employee sponsored retirement plan, you can still make monthly contributions to an Individual Retirement Plan or IRA to mimic a 401(k) plan. You won’t benefit from a match but with recurring deposits and compounding interest, you can still reap some of the same rewards with an IRA. Visit to find the right retirement investment option to help you meet your retirement goals.

Speak with a Financial Advisor

A good financial advisor will take a look at your finances, including debts owed, and help create a comprehensive plan for you to achieve your financial goals. Financial advisors will help plan for paying back debt, saving for retirement and beyond. Financial advisors can also offer advice and guidance on how to manage and pay off different types of debt, including credit cards, student loans or a mortgage. With a little help from a financial advisor, you can get started on a plan to help you stay on track to accomplish your money goals.

The decision to pay off debt or save for retirement has no wrong answer. Essentially it comes down to personal preference and your own personal financial situation. Some people enjoy not owing anyone money, others feel comfort in knowing they have a large cushion saved for retirement. Whichever you decide, SDCCU is here to help.

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