Congratulations!

You’ve got your emergency savings locked down and now you are moving on to the next step in your journey: paying off high interest debt. While you rightly prioritized building up an emergency fund over retirement savings, now what?

Credit Card Payoff or Retirement Saving: Which one wins?

Math may help you decide on your next priority, but honestly, it will only take you so far. You need to bring some of your emotion to the game. If you have a credit card balance accruing interest at 18%, this is clearly more than your retirement investment will earn. On the other hand, when investing for retirement, time is your greatest asset. Here’s how it could look:

If you have a $5000 credit card balance, a $200 monthly payment will have you out of debt in about 2 ½ years. You will pay about $1300 in interest along the way.

Let’s assume retirement is 30 years away. While you are paying off your credit card, you do not invest for retirement at all. But you pick up later, and start to redirect that $200 to retirement when your credit card balance is zero. You can expect your investment to grow to about $209,000 by the time you are ready for it. (I have assumed an 8% rate of return.)

But what if instead, you only pay $150/month on your credit card, immediately investing $50/month for retirement? You will pay an additional $700 in interest and it will be 4 years until you are debt free and ready to invest the full $200. But on the other hand, by starting immediately, your retirement nest egg will reach almost $215,000.

The difference in retirement balance results is considerable, but by no means vast. You would not be completely “wrong” if your chosen path was to continue as you were before, prioritizing credit card payoff over investing. You will have the emotional satisfaction of getting out of debt faster.

And yet, doing nothing at all towards retirement for this period not only will cost you in dollars and cents, it can cost you the psychological boost that you get when you are taking positive steps to secure your future and seeing your savings grow. Putting off thinking about retirement until some uncertain day in the future leaves you open to the risk of never establishing the habit of investing, and ultimately leaving it until too late.

My advice?

Even as you pay down your high interest debt, contribute what you can to your retirement, however modest. Certainly as much as the employer match. But if you do not have a match, nevertheless designate some portion of your cash flow to your future.

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