When choosing between paying off debt and putting more toward your future, consider your total debt, the interest rates on those loans, and your overall retirement plan options. Here’s how to evaluate those two options and decide if you’ll put money toward one or the other, or a combination of the two.
Go For the Free Money First
Does your employer offer a matching contribution (usually 5% or 6% of your overall salary) toward your retirement plan? If so, make sure you are meeting that matching obligation. Otherwise, you’re leaving free money on the table.
Compare Invest Rates Versus Investment Returns
According to the U.S. Securities and Exchange Commission (SEC), no investment strategy pays off as well as eliminating high-interest debt. Additionally, the Consumer Financial Protection Bureau (CFPB) recommends clearing high-interest debt to free up your budget, making it possible to put more toward retirement. The common denominator is “high-interest debt.”
The amount of debt and the interest rate you’re paying have a big impact on whether or not you should pay off that debt or put the money toward retirement. Here’s how to decide:
| What is the Debt Interest Rate (APR)? | Best Option | Why it Works |
| 8% or higher (any balance) | Aggressively pay off the debt | Paying down high-interest debt helps ease strain on your budget, allowing you to eventually put more toward retirement. |
| 5%-8% (any balance) | Equally pay off the debt AND put some money toward retirement. | This strategy will allow you to put some money toward the future while you pay down debt. Once the debt is paid off, put those payments toward your retirement for the possibility of added growth. |
| Less than 5% (less than $10,000) | Maximize your retirement savings. | Depending on how much you own in debt, there is a chance you could earn more in a retirement account than it is costing you to carry the debt. |
Do You Have Student Loan Debt?
The IRS allows employers to make matching contributions to a retirement account as you pay off your student loans. Ask your employer about the SECURE 2.0 Act, including qualifications and options.
Boost Your Financial Wellness
More Financial Wellness Matters blogs on topics ranging from financial self-care to protecting your financial health are coming soon. Twice a month, we’ll dig a bit deeper into the relationship between financial health and overall well-being, shedding light on the behaviors and beliefs that drive money relationships. With simple tips and proven insights, we hope to enhance your financial well-being and help you live a healthier, happier life.
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