Don’t know which pension plan to choose? here’s a detailed comparison between saving for retirement versus paying off debt and buying a home.
If we want to live a better life, we have many options. Some are simple choices on how comfortably we can live, while others are more difficult. Trying to decide whether to buy a house or start saving for retirement when we have a pile of debt in our name is one of the hardest decisions to avoid future regrets.
Most Americans drop out of school not only with their certificates, but also with a lot of debt. Since school debt is always on fire, some people are also racking up bills for credit cards, car loans, etc., keeping them even more in debt. Many people cannot be blamed for this because sometimes debt is a necessity of life. After all, paying cash for a house, education, or even a car isn’t affordable for most families, so borrowing is the next viable option.
The older you get, the more other facts of life start to pile up on you, such as buying a home and saving for retirement. Now the question arises: if you have debts to pay off, but you also need to buy a house, you also notice that retirement is fast approaching and you need to start preparing; What do you do first?
Plan retirement pension 1 Savings
Retirement is a fact of life because we would all get old one day and stop working. Even though we are still strong enough to continue working, we are required by law to quit at a certain age. Even if you are running a business, you still have to retire at a certain age. The mistake most young people make is that they think retirement is still a long way off and are keeping retirement savings as a plan for the future.
Research has clearly shown that to achieve the ideal egg retirement; You have to start early enough. Investing a little more often may be a better idea than scheduling a bulk dump at a later date.If you have access to 401 (k) at work and your employer matches contributions, you may need to prioritize to invest at least enough money. to get a match. In this way, your employer helps you increase your retirement savings.
Another advantage of investing in a 401 (k) or IRA is that you get tax breaks for investing. These tax breaks essentially provide a guaranteed return on your investment as you lower your tax bill. If you contributed $ 5,500 in IRA contributions and had a 22% tax cap, you would save up to $ 1,210 in taxes. Style
Deferring your retirement savings until you run out of debt can cost you the most. With compound interest, even small contributions to your retirement plan can skyrocket.
If you wait to pay off your debt before saving for retirement, but never manage to pay off the debt, one day you may find that the time has come to retire and you don’t are not at all prepared; and you may even still be in debt. Believe me, a lot of people are in this position.
The IRS sets limits on the amount you can deposit into tax-free retirement accounts each year; if you do not take the opportunity to contribute to this limit, you will effectively lose this opportunity forever. This, coupled with the fact that a delay in investing means you are wasting time building up your investments, is a compelling reason to save on retirement, even if you still have debt.
Again, if you work in a place like this, if your employer contributes a percentage to your pension plan, it makes sense to use that plan. If your employer compares 50% of your contributions to 6% of your salary, you should pay 6% to maximize employer compliance.
But even if this type of contribution limits your budget, you can still contribute 4% of your salary, obtain an employer compensation of 2% or even pay 2% of your salary to obtain an employer compensation of 1%. If you can do it by prioritizing paying down debt, you will win in the end.
Pension plan 2 Debt payment
If you currently have significant debt, you know the emotional damage it takes. You spend time worrying about how you’ll pay your bills and stay on budget each month, not to mention moving forward. You might even lose sleep due to the state of your finances. By freeing yourself from your debt, you will free your mind and your emotions to freely focus on moving forward.
On a more tangible level, once you’re debt-free, you’ll not only have more control over your finances, but you’ll also have more free cash to funnel into retirement savings and other investments. Paying off your debt may be the best way to maximize your pension contributions, at least at a later date. When you pay off your debt, you may even tell yourself that you are doing it to prepare for retirement.
Understand that while the terms of any loan agreement are fixed, investment performance is not. Stocks can fluctuate in value, but debt cannot. In other words, there is a fundamental imbalance between debt and investment.
Worst case scenario: As you prioritize pension contributions over debt repayment, the stock market goes down and 40% of your pension assets are wiped out. But what happens to your debt in this scenario? Nothing – you still have as much debt after the accident as before.
Thus, debt repayment is a guaranteed investment. This not only eliminates the interest charges that debt incurs, but it also ensures that your future cash flow improves.
How easy it is to pay off debts
If you are looking for an easy way to get out of debt, you can try debt consolidation. Debt consolidation involves combining different debts into one portfolio, which can be done in a number of ways: balance transfer, debt consolidation loan, home equity loan, or line of credit.
A balance transfer involves the transfer of your debt (eg, credit card debt) A percentage of the credit card transfer. This is the right way to go if you can pay off all of your debt over a period of 0% per year (typically 15-18 months).
A debt consolidation loan is exactly what it sounds like: A loan with the explicit purpose of paying off debt. Personal loans are a good option because you don’t have to give up any collateral and you can choose from a range of repayment periods and rates.
Finally, a home loan or line of credit can help. of debt, but only if you have a house. You can use the equity you’ve built up in your home to get a loan or a line of credit for debt consolidation. However, this is our least recommended way to pay off debt because it is about securing your home as collateral.
Pension plan 3 Buying a house
Buying a home can be really exciting, and the excitement doesn’t even go away from the fact that it will put you in debt. After all, you are only trying to secure your future. But the fact remains: Buying a home will start paying off your mortgage, and that payment can take 10 to 30 years.
But beyond the social privileges and freedoms embodied by a house, it is also a very real tangible good that can help fuel future dreams and aspirations. Other benefits of buying a home include:
- tax incentives
As a homeowner, you can deduct mortgage interest (up to $ 1 million) and property taxes from your annual income taxes. So owning a home can reduce the amount you pay in income tax each year. Your mortgage and property tax interest can be deducted from your federal taxes, as well as many state taxes. Certain closing costs and credit discounts may also be tax exempt. If you are a new homeowner, you get even more benefits because most of the money you pay on your mortgage is spent on interest.
- Price increase
Houses tend to get more expensive over time. In general, the value of most homes will increase over time. If you buy your home for $ 150,000 and the annual rate is about 3%, in 30 years your home will be worth $ 449,043. This is an incredible increase in the value of your home, making it a great investment for you.
- You have the possibility to strengthen your credit
When you buy a home and make regular monthly payments, it shows other lenders that you are a good borrower and that the risk of default on your loan is low. As your credit rating increases, you open the door to better loan terms and better interest rates. your future purchases.
- Agreed budget
- You make a profit when you decide to sell
When you own a home, the value of your home increases over time. If at some point you decide to move on, you can sell your house for a big profit. If you live in a rented house and the owner decides to sell, you walk away with nothing and you might even find yourself in a dilemma. The longer you have been a homeowner, the better it is for you and the higher your bottom line will be.
All of this and more shows that buying a home has both long and short term benefits. But the question remains whether to buy a home instead of paying off other debt or saving for retirement.
Saving for retirement vs. paying down debt vs. buying a home is better
There is no denying the fact that it will take a long time to turn your retirement savings into a much bigger nest, thanks to the increase in investment income, which means that the deferral of retirement savings is a bad idea. But letting the debt accumulate interest for you while you send precious dollars to your retirement account doesn’t make much sense either.
On the other hand, some people may decide that it would be more beneficial to just get a home anyway, given all the benefits of buying a home.
If you ask this question, it means that you owe a lot of people or organizations; You haven’t started a retirement plan yet, or you may have one and want to keep it in the background; is considering buying a house.
- Retirement savings must be the priority
After looking at all the variables, we decided it made more sense to save for retirement before anything else. This is because it would take a lot of savings if you normally ignore this aspect now. The retirement plan should be as much a part of the budget as your rent, car, cell phone, and cable. Debt can come or go, but retirement is a part of your life, and if you don’t prepare for it properly, you will eventually fail.
As previously stated, if your employer offers the appropriate 401 (k) contribution or other retirement savings contribution, deposit as much as needed to get that free money. If you don’t have a retirement plan at work, open a Traditional IRA or Roth IRA.
You can set up recurring transfers from your bank account to simulate the simplicity of automatic deposit at the workplace. The bottom line is that you should have a retirement plan, no matter how small you decide to contribute at the same time, taking into account your other expenses.
- Paying off debt at high rates should be your next priority
If you have credit card debt, payday loans, or arrears with variable or high interest rates – something like 9% – you need to decide before you think about adding another mortgage debt to your stress.
As a first step, you can focus on paying off the least amount of debt, while still making the minimum payments on the rest. Once that pays off, focus on the next debt and so on. Likewise, you can start with the biggest debt and reduce your expenses, whichever method works best for you.
Allocating extra money to pay off debt at high interest rates can improve your financial situation, even if that prepayment delays your efforts to save and invest for your retirement or other financial purposes.
If you have payday loans, short term payday loans, which often have interest rates above 300%, you need to focus on paying them off first. Investing: Payday loans and other predatory loans like car loans are so expensive that they are supposed to cause you to keep borrowing forever, so paying them off as soon as possible should be your top priority.
On the flip side, be aware that debts like mortgages, car loans, and personal loans sometimes come with fines if you pay off too early. If so, then paying off those debts aggressively often doesn’t make sense, or doesn’t make sense at all, because most of the money you save on interest is wasted when you decide to pay off. this penalty. Therefore, when you decide to pay off your debt earlier than planned, you will also need to consider any prepayment penalties that you might be paying.
This suggests that there are some debts that need to be settled quickly, while there are others that can work at the same time. with your other projects. The type of debt you owe will determine your priority in this matter.
- Then the mortgage
Once you have essentially reduced your debt burden, you can now start to think about getting a mortgage. There are many benefits to buying a home, but you should understand that getting a mortgage comes with even more debt. It can be a good idea to postpone buying a home until you are free from your debt or your debt portfolio is smart enough that you can manage it with just about anything else.
Note. When you set financial goals, you don’t need to spend all of your extra money on debt relief, and you don’t need to spend all of your money in retirement. You can split your extra money and fix both issues. Paying off debt and saving for retirement at the same time puts you in a better position than you would otherwise.
Sharing your efforts can make it harder to count the gains and keep the momentum going because you don’t get your debt paid off as quickly, or you hit retirement or mortgage milestones so quickly. But you can get around these issues by taking steps like automating debt payments and automating contributions to investment and savings accounts. If payments are automated, you won’t have to make the right choice every month.