No matter how much you make or what stage of life you’re in, you’re going to have to prioritize spending and saving. And when it comes to big financial goals, such as paying down debt or saving for retirement, it’s not always clear what to focus on first.
If you do have extra funds, how do you prioritize? The good news: It doesn’t have to be an either-or question. It’s all about finding a balance that’s right for you. Here’s how.
1. Review your budget to boost savings and trim debt.
Whenever you set up a budget, include line items for every expense and savings goal, including paying off debt and adding to retirement funds. Even if your contributions each month are minimal, you’re establishing good habits
Tip: Use a household budget worksheet (PDF) to help analyze where you spend and can save over the course of a month or two.
Review recent bills, plus bank and credit card statements to establish a baseline. Then adjust based on spending and saving goals. Think about how you’re really spending your time, recommends Stanley Poorman, a financial professional with Principal®, and you may come up with extra funds. For example, if you’re paying for several streaming services but only use one or two regularly, you may consider canceling the others.
2. Avoid unexpected debt by saving in an emergency fund.
If it would be difficult for you to cover unexpected expenses such as car repairs that require an immediate outlay of funds, make it a goal to build an emergency savings fund. Take it step by step—focus on saving just one month of income as a starting point. Add to it as you’re able.
Having an emergency fund can also help avoid or minimize what Heather Winston, a financial professional and director of individual solutions at Principal, calls “bad” debt. “'Typically, ‘bad' debts are credit cards or things like payday loans,” she says. “They charge higher interest rates and that can prevent you from getting ahead.”
“Emergency funds can be used for unexpected expenses rather than putting them on a credit card. While debt has a place, using it wisely may serve you better long term."
3. Save for retirement to get the maximum match from your employer.
Free money sounds like a great way to save, doesn’t it? If you work for a company that offers a matching contribution on a 401(k) or 403(b) retirement plan, that’s essentially what you’re getting.1
If you save 5%, for example, and your employer matches it, you’ve instantly doubled your savings. That means $100 saved doubles to $200 saved without any extra budget maneuvering from you.
Work toward increasing the percentage you’re putting in that retirement fund until you at least reach the maximum matching contribution from your employer.
4. Set some debt-reduction goals that help you.
How much debt you have influences all sorts of decisions you make. For example, if you’re hoping to buy your first home or upgrade to a larger home, “carrying too much debt relative to your income may hinder the loan rate you can get,” Poorman says. “Prioritizing debt repayment may help in achieving this goal.”
However, that doesn’t mean you should put retirement savings on hold until you eliminate all debt. “Most of us have competing timeframes and goals, so it’s unrealistic to think that you can stop saving for retirement just to make your debt go away faster,” Poorman says. “The key is to understand how long it will take to get to that manageable debt ratio and adjust your other priorities accordingly.”
“Most of us have competing timeframes and goals so it’s unrealistic to think you can stop saving for retirement just to make your debt go away faster.”
Stanley Poorman, financial professional
5. Tackle ‘expensive debt’ first.
Just as there is bad debt, there may also be “good” debt. “If all you have are ‘good’ debts like car and mortgage payments, then you may be in good shape to build on your retirement savings,” Poorman says.
If not, make a list of all your debt obligations and their associated interest rates. Debt with a higher interest rate— say, the typical credit card—should be a priority. “The interest you pay may be higher than the return you’d earn on saving those same dollars,” he says.
Pay more than the monthly minimum if you can. Once you pay off the highest interest rate debt, move to the next loan on your list. When you’re all done? Consider putting that same amount that you allocated to debt repayment toward retirement savings.
6. Accelerate your long-term savings.
You don’t have to be debt free to save more for retirement though. It depends on your individual priorities and goals. “It’s about finding the right balance between paying down debt versus saving,” Poorman says.
It can be overwhelming to compare how much you need to save for retirement to how much you’re able to save. Instead, consider small steps which will eventually get you to your goals.
Tip: Use the Principal® Retirement Wellness Planner to see if you’re on track with your retirement goals.
“For example, you can increase your retirement savings each year until you’re contributing at a level that gets you to your goal,” Poorman says. That small increase each year is unlikely to make a large dent in your monthly budget, but it will make a long-term positive impact on a more secure retirement.
7. Talk to a financial professional.
To plan for your future, it’s helpful to know where you stand financially. If you’re overwhelmed, ask for help. A financial professional will talk you through your options. Don’t have one? Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.
Next steps
Is debt affecting your ability to save for future goals, like retirement? Log in to your Principal account to see how you’re doing. Don’t have an employer-sponsored retirement account or want to save even more in addition to a 401(k)? We can help you set up your own IRA or Roth IRA. Ready to continue building your financial foundation? Our learning library has information on everything from building a budget to buying a home.
