Having high debt and not using credit cards in the correct way make it hard to save for the future. That’s because money you are using to pay the debt could be used to earn interest for use in retirement. The good news is that there are ways of reducing debt and other common financial setbacks.
1. Using Savings to Pay Back Debt
Table of Contents
You might think it is better to pay back debt with your retirement funds, especially if you have a high interest rate on your debt. However, things are not quite that simple. You will lose the power of compound interest. And it is often hard to pay back the funds once they are gone. Plus, you could need to pay fees. If you have student loans, a better option might be to refinance them into a new loan with a private lender.
You can often get a lower interest rate, or you might be able to extend the lifetime of the loan, allowing you more time to pay back the funds. You can use a student loan calculator to know what you will pay each month.
2. Living from Paycheck to Paycheck
Many people don’t save as much as they should, and that means they depend on the next paycheck coming in to meet their living expenses. However, if there is an unforeseen problem, it might require more funds than are currently available. By overspending, you place yourself in a precarious place, and it means that one delayed or missed paycheck could spell disaster. But that’s not a place you want to be if the economy hits a recession, or you have an unexpected expense.
In this case, you would not have very many options. Many times, financial planners recommend keeping at least three months of living expenses saved up where you can get to them easily. If you lose your job or the economy changes quickly, your savings might drain quickly, forcing you to live on debt – and borrowed money often comes at a high cost. With a three-month buffer, you will be able to stop stressing so much over finances.
3. Not investing in Your Retirement
You should have your money work for you through various investments so you can retire at some point. To be comfortable in later years, you need to protect what you earn and contribute to your accounts each month now. Look into tax-deferred accounts, where you can contribute the funds, you earned before taxes were taken out. And see what type of plan your employer offers. It is often a good idea to work with a financial planner to determine how much risk you can tolerate and how long you will have for your investments to grow.
4. Getting a Brand-New Car
Many cars are sold each year, but a lot of people can’t really afford to pay for them. Still, if you can’t pay cash for a new car, you won’t be able to afford it. Just because you can afford the payment doesn’t mean you can afford the vehicle itself. Plus, when you take out a loan, you are paying interest on something that is depreciating.