At a Glance

Whether you should pay off debt or save for retirement is a common debate in the world of finance. On one hand, you have debt that’s accumulating interest and costing you hundreds or even thousands of dollars every year. On the other, you have a retirement savings account that’s producing an annual return and growing exponentially every time you make a contribution. Which one should you focus on?

The answer is not a simple one. Everyone’s situation is different, but there are some general rules to help you figure this out.

In this article, you’ll find:

We’ll do our best to answer that ageless question, “Should I pay off debt or save for retirement?” You might be surprised at what we’ve come up with. Please read this in its entirety before making any decisions.

The Argument for Paying Off Debt First

Americans are funny creatures. We spend most of our lives accumulating debt, but always searching for ways to get rid of it. The obvious solution is to stop taking on new debt. That’s a necessary first step. Once you’ve made that decision, you can make the choice to pay off debt or save for retirement. Are you there yet?

Debt comes with interest charges. That means it’s costing you money every month that you carry a balance. You could view this as a strong argument for paying debt off first. That way, you’ll have more money to invest in retirement later. Let’s assume this is your preference. The next question is, how do you go about doing it?

How to Pay Off Debt

One of the fastest ways to pay off debt is to apply for a debt consolidation loan and use it to pay all those high-interest credit card balances. Your loan payments will be less than the cumulative total of your minimum monthly credit card payments, so you may not have to make the choice between paying off debt and saving. You’ll be able to do both.

Another way to deal with credit card debt is called the debt snowball method. This is a technique where you make a list of your debt balances and prioritize them from lowest to highest. You’ll then make all your minimum monthly payments and put extra money toward the account with the lowest balance. Once that’s paid off, work on the next lowest balance.

A tool we think you’ll find helpful in this process is our loan payoff calculator. You can use it to figure out how much you’ll be saving by paying off debt early. Do the math, but try to keep an open mind. You may not be saving anything if you’re losing the returns you could get by investing more in your retirement fund.

Related: The Risks of Paying Off Debt with Retirement Money

The Argument for Saving for Retirement

Should you stop 401(k) contributions to pay off debt? When phrased this way, the question hits closer to home. Most people are horrified when it’s suggested that they tamper with their 401k contributions, yet that is exactly what the “pay off debt or save for retirement” debate is all about. Are you prepared to stop your pre-tax contributions to pay off your credit cards?

Related: Should You Use a 401k Loan to Pay Off Debt?

In case you didn’t get there on your own, the answer should be a resounding “no.” Retirement savings should always be the top priority because that money grows over time. Contributing more, especially early in life, could lead to an early retirement. Stopping your contributions might leave you without the funds you need to live comfortably in your golden years.

Debt payments and savings deposits should be two separate activities, not linked together. Taking from savings to pay off debt is an act of desperation that is normally not necessary. If you’re patient and calculate debt payoffs with only your net income, there’s no reason to stop your 401(k) contributions. If you can do that, you can have the best of both worlds

Frequently Asked Questions

How much should you save for retirement while paying off debt?

Your retirement savings plan doesn’t need to change while you’re paying off debt. Continue to make pre-tax contributions to your 401(k) and use your net income to pay off your debt accounts. The 401(k) contribution rate should range between 5% and 15% of your gross income, depending on your current age and goals for retirement.

Is it smart to save while paying off debt?

Yes. The best solution is to save and pay off debt at the same time. Don’t ignore your debt, but make savings a priority, particularly retirement savings. This will greatly benefit you later in life.