Paying Down Debt

Scott Campbell |

I am often asked about paying down debt vs. contributing to the retirement account.  People have limited cash flow and want to know how best to put their money to use: should they contribute for retirement or pay down debt?

My answer may sound like a cop out, but both are important and should be addressed. 

The mathematical approach to answering the question requires comparing the interest rate you are paying on your debt vs. the investment gain you are earning on your investments.  Your money should be directed towards the higher rate.

Paying down debt is important.  Some long term debt is necessary, like a mortgage or college loans, but short term credit card debt is not good.  You should always strive to keep your short term debt minimal.  Please, if you are having trouble in this area, seek the help of a credit specialist who can help you manage your short term debt.

Investing for retirement is extremely important.  People are living longer and longer and the cost of living is going up, especially the cost of healthcare.  Social Security doesn’t provide a meaningful retirement income now and it is not going to be around forever.  If you don’t invest for your own retirement, the outlook will not be good.

Actually paying down debt and investing for retirement go hand in hand, because short term debt hampers your ability to invest and will definitely reduce your standard of living in retirement.