Let me begin by saying that one shouldn’t consider the debate between paying off bills and saving for retirement as totally opposite beliefs. The truth is that for long term security you’re going to need to take care of both as time goes along. You never know how long you’ll live once you retire and the last thing you want is to be saddled with a lot of debt and not enough money to pay for everything.
ArtTower via Pixabay
With that said, let’s look at this discussion from some practical terms. The difference between paying off bills you have now and deciding to put money away can be drastic. It’s hard to see for most people because the numbers can be overwhelming, so we’re going to put it in terms that hopefully make it easier to understand with a little example.
We’re going to use $100 as the base number to start with. Then we’re going to compare an average credit card interest rate against a typical income earning rate if you put money away for your future.
We’re going to do a calculation of credit card debt by saying that you average $100 a month that you spend on a card that has an interest rate around 14% annually (that’s a low number but let’s go with it). What that means by the way is that every month the interest amount being applied to your balance is around 1.24%, which your mind will say doesn’t look all that bad. Each month, when you get the bill, you pay $20, which is the minimum amount the credit card company is asking you for. If you did that until the bill is paid, you’d have added $5.24 to your original balance and taken 5 months to pay it off (your last payment would be $5.24).
Now, assume that you decide one day to put $100 a month away in a money market account, and you were lucky in that it was paying out at an interest rate of 6% annually (the average is 3% by the way). That means your money is growing around .5% every month. In the same 5 month period, your investment would have earned you $2.53 if you weren’t putting money into it every month or so.
Even with the low dollar amounts you’re seeing, you can tell there’s a major difference in the debt you’ve accrued going against the money you’ve earned. The reality for most people is that they’d keep buying things using their credit card, which would increase the balance without necessarily increasing the minimum payment until you reached a new plateau.
This means the amount of debt would increase drastically faster than your investment would grow, even if you continued putting in the same $100 on a monthly basis for at least a couple of years. Also, most people end up with multiple credit cards which means the debt grows even faster than it started, while your investment does increase but can’t keep up with your growing debt.
when you see numbers like what’s above, hopefully you realize how important it is to not only pay down your debt and limit its growth, but to try to pay more than the minimum when you can. You still want to put money away, probably more than just the $100 a month if you can afford it, but getting rid of current debt should be the most important thing you do for your long term peace of mind.
This is one reason why we stress the importance of learning how to budget your money so you know how much you have to pay and how much you have left for everything else. It can help give you a handle on keeping your debt load lower and possibly eliminating most of it sooner. It can also help you learn how to keep investing more money into your retirement savings so as your debt goes down your investments go up.
If you can attain a balance of paying down debt while increasing funds on the other end, you can end up in retirement with fewer monetary worries… possibly none at all. You might even feel good enough to decide not to retire instead of realizing that you have to work instead of having the choice in the matter.
If you have trouble weaning yourself off credit cards on your own, it might be helpful to contact someone who can help you with that… like an accountant perhaps? 🙂