Do you, like many other Americans, carry debt? If so, you may have heard the advice (or been given it directly) to wait until you pay off that debt before saving for retirement. However, is this actually a bad idea? It may be. Here are a few reasons why you might not want to wait even if you're paying interest on your debt.
1. Time Means Compound Interest
Compound interest is a powerful financial tool. It refers to the fact that as your contributions earn interest and dividends, that additional money is added to the pile. Future interest and dividends are paid on that expanded amount. This boosts growth over time. So the earlier you can get those interest and dividends, the less you'll need to contribute overall.
2. Good Habits Start Early
Saving for the future — rather than just paying for the past — is an important financial habit. But you can't build good habits if you aren't practicing them. Regular contributions as early as possible soon become a way of life, signaling more success in lifetime savings. It can even help in non-retirement savings.
3. Debt May Last a Long Time
Holding off on retirement savings until you reach a single financial goal can be a smart move if it helps you focus. However, many Americans find that paying off all their interest-carrying debt is harder than it seems. The project can drag on for years. It may never go away. In both cases, you've put your retirement at risk unnecessarily.
4. Good Debt Is a Thing
Experts generally agree that there are two types of debt. The first is bad debt, which pays for depreciating assets and has higher interest rates. Good debt, though, is inexpensive and builds investments. Good debt, such as your mortgage or debts at a zero interest rate, can contribute to financial growth. You may not want to accelerate their payoff or sacrifice retirement for it.
5. You Can Have a Balance
Retirement savings and debt payoff aren't an either/or proposition. You can work toward more than one goal at a time, just as you work for multiple goals in other areas of life. Even on a tight budget, most people can find a healthy balance that lets them pay off the past while preparing for a better future.
Where to Start
Want to find the right balance between getting rid of your old debt and planning for retirement? Start by meeting with a financial planner to learn more about retirement planning. With their help, your retirement will be better and brighter.