The question ”Should You Pay Off or Save For Retirement” is often discussed and everyone seems to have a different answer. However, we’re here to break it down and make it simple. The main thing to consider when deciding whether to pay off debt or save for retirement is the type of debt you are in. So, we’re going to look at the different types of debt and which option could work for you. Prioritizing paying off high-interest debt can free up more income for retirement savings, giving your future nest egg a boost. We will also look at some of the other deciding factors, such as age, however more often than not, a combination of saving for retirement and paying off debt is what works for people. 
We’d always suggest working with a financial advisor, as they will be able to look at your situation specifically and provide more accurate advice that you can utilise. However, if you want an overview, you’re in the right place! 

Depends On The Type of Debt

So, as mentioned, a huge factor to consider when deciding whether to pay off debt or save for retirement is the type of debt you have. We’re going to look at a few different examples. 

Credit Card or Catalogue Debt

If you have built up debt on credit cards, catalogue debts or through any other short term repayment plans, then paying off your debt before saving for retirement is usually the best option. This is because these types of debt tend to have very high interest rates, so you could be saving £300 a month towards your retirement, but building £350 a month in interest. This means not only are you not saving anything for retirement, but you’re also not even paying off the debt, just your interest. So, if you have debts with high interest rates, do everything you can to pay them off quickly. While CFD trading in Denmark can offer potential for high returns, it also carries significant risks and should not be considered a quick way to pay off debt. If you’re struggling with the interest rates and the repayments are becoming unmanageable, make sure to speak to a debt advisor who may be able to help you find a solution. 

Student Loans

If you’re based in the UK and you have student loan debt, then we would usually recommend saving for your retirement rather than paying them off. The average university student in the UK has around £45,000 of student debt. The way the system works in the UK, you pay off your student debt relatively to how much you earn, so you will never be paying an amount that you can’t afford, based on your income. Student loans are also wiped off 30 years after you make your first repayment, so you will need to be making quite a considerable amount of money to pay off your debt anyway. Although interest is very high on student loans, you’re never pressured to pay it off quickly or by a certain date. So, in this case, you should definitely start planning for your retirement, even if it’s saving £100 a month. 

In the US, the student loan situation is very different, and often people take out private loans in order to pay their tuition fees. In this case, you may need to focus on paying off your student loans short term before saving for retirement. Again, if you’re unsure how to navigate this and need help, speak to a financial advisor. 

Mortgage

With mortgages, if you are paying a higher interest rate on your mortgage than you could earn from a savings account, then it might be worthwhile to put everything you can into paying off your house as early as possible. Often referred to as “good debt”, property is one of the most stable investments you can make, so if you can afford to pay off chunks of your mortgage, then you should. The quicker you pay off your mortgage, the less interest you pay, and therefore overall you do pay less. This being said, when all of your savings are put into your mortgage, you may need to be prepared to downsize one day in order to reap the benefits of your investment in terms of retirement savings. When it comes to your mortgage, for most people, paying over your minimum mortgage repayments where you can and also saving for retirement in a strong savings account will be the best method. 

Plan An Emergency Fund

Now we’ve covered the different types of debt and what you should do, we need to discuss having an emergency fund. No matter what route you decide to go down, whether it’s paying off debt or saving for retirement, you need to have an emergency savings fund in place. While the Crypto market offers potential for rapid returns, investing with debt can be risky and is not recommended as a primary strategy for paying off debt. This might not be possible depending on the type of debt, for example if you have an IVA, your savings will likely need to be used to pay off your debt. However, for the most part, you should have an emergency fund. We’d always recommend this being at least 3-6 months of your living expenses, so if you spend £1,500 a month, you should have £4,500-£9,000 saved. 

Quite simply, your emergency fund will cover, emergencies! Things like paying for your boiler to be repaired, unexpected medical bills, car repairs, loss of job, expensive dental work like All On Four, and so on. These are things that you can’t plan for or pre-empt, so on top of your retirement fund, have a good chunk of money saved. It might be annoying at the time saving money for nothing in particular, but best case scenario you don’t need the money and it can be invested elsewhere, worst case, you save yourself from financial turmoil. Keep topping up your emergency fund and then you can reap the benefits later down the line.