Retirement Savings vs. Debt Payoff: Which Come First?

Having a handle on your finances and living comfortably are goals we all want to achieve. The closer you get to retirement, the more important it becomes to maintain that control. One classic debate on this topic is the ranking in importance of saving versus paying off — or paying down — debt. Is one more beneficial than the other? Is there a sequential order you should follow? There is no one-size-fits-all answer because everyone’s situation is unique. In Northern New Jersey, where property taxes are particularly high, it can be difficult to imagine retiring by age 67, if at all! No matter who you are, where you live or what you fiscal status is, though, it’s important to first look at the big picture.

nve-blog-retirement-savings-debt-payoffYou might be wondering how you can justify, or even manage starting a retirement fund when you have credit card, mortgage, student loan and other debt. You’re not alone. At NVE Bank, we believe prioritization is the name of the game. Before making any spending or saving decisions, sit down and take a good look at your cash flow situation. Once you’ve accounted for every penny, you can establish a budget. If you don’t like “the B word,” call it what it really is: a spending plan. Knowing where your finances stand will allow you to determine both what you can save and what can be put toward debt.

It may seem like common sense to get out of debt before saving for retirement. This is especially true for individuals who are very far from retiring, or whose employers do not offer a 401(k) or other savings benefits. Here are a few potential benefits of paying off debt before saving.

Lower monthly payments. The less you owe a lender in total, the less you owe per month. By paying off debt — and not creating any new debt in the meantime — your expenses will continue to decrease, allowing you to allocate your newly available funds elsewhere.

Good credit. Paying debt down can boost your credit score, making you eligible for better interest rates. This will come in handy the next time you take out a loan.

Less interest. By paying down your balance on a loan, you will ultimately accrue less interest in the long term. Pay more than the minimum payments on credit cards whenever you can to reduce the lifetime of the loan.

Reduced risk. The less debt you have, the less you’ll have to worry about should you find yourself facing unforeseen unemployment, salary reduction, or personal emergencies.

Those are all good reasons to reduce your debt before saving for retirement, but they are not applicable to every circumstance. The following situations may warrant saving for retirement before paying your debts.

If you are considering retirement in the near future. The closer you get to retiring, the bigger a priority building your nest egg becomes.

If your employer offers to match your 401(k) contributions. The supplemental money you will accrue may be comparable to, or even exceed the interest owed on your debt.

If your debt is tied to a mortgage. Entering retirement with a mortgage can be scary, but other kinds of debt are worse. Because mortgages carry a relatively low interest rate, reducing mortgage debt is typically viewed as less pressing than reducing credit card debt, for example. There are exceptions, but this is a good general rule of thumb.

If your debt is small. The less indebted you are, the faster you should be able to pay off what is owed. If your debt is manageable enough to continue making payments while putting money into savings, this is a good option.

Regardless of when or how you allocate your income, here are a few tips to consider that just make good financial sense.

Prioritize your debt. Some forms of debt are worse than others for various reasons. Ask a trusted financial advisor to help you prioritize your debt and come up with a payment plan to minimize any negative impact.

Cut out the extra. Making small, manageable spending changes can go a long way. Making coffee at home, bringing lunch instead of buying it, only going to a restaurant if you have a coupon — these are all fairly easy ways you can free up income for saving or paying down debt.

Don’t pass up free money. If your employer offers a matching program for your retirement plan, be sure to contribute enough to be able to take advantage of that. It’s literally free money.

You can open an IRA at NVE Bank for as little as $10. Our IRA specialist can provide expert advice on what options make the most sense for your retirement needs. For more information, e-mail You can also visit the NVE website, stop by your neighborhood branch in Bergen County, or call 1-866-NVE BANK.



About NVE Bank

The NVE Blog should not be used for banking purposes relating to NVE Bank. Please do not disclose any personal or business banking information on this site. NVE is an Equal Opportunity Lender, Equal Housing and Member FDIC. Visit NVE Bank, established in 1887, offers an extensive range of personal and business products and services. The Bank maintains 11 offices conveniently located throughout Bergen County. For more information, please call our toll-free number 1-866-NVE-Bank (683-2265) or visit our website at
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