Save for retirement or pay off debt? Here’s how to do both

Everyone, no matter their income or life stage, makes choices about how they spend and save. It isn't always obvious which choices should come first. Take your own big financial goals like paying off debt or building retirement savings; it's hard to find balance. For example, 70% of retirees say putting funds aside sooner should have been more important.

The good news is, with saving for retirement and paying down debt, it doesn’t have to be an either-or choice. You can do both. Here are ways to find balance and develop a plan that works for you.

Unexpected expenses—like a car repair or medical bill—can make debt harder to manage. That’s why it helps to save a small emergency fund first. This can help keep you from adding new debt when those surprise expenses come up. A good rule of thumb is to aim to save at least three to six months’ worth of essential expenses, but even one month of income or expenses is a great start. Keeping these savings in a traditional savings account—easily accessible—can help protect you from having to fall back on credit cards if you lose a job, have a medical emergency, or if life just happens.

If you work for a company that offers a matching contribution on a 401(k) or 403(b) retirement plan, try to save at least enough to get the full amount. A match is like free money. 

Here’s how it works: Say your company matches whatever you save, up to 5%. If you put aside 5% of a $50,000 salary, you’re saving $2,500, and your employer automatically adds another $2,500, doubling your retirement savings contribution. 

If you can’t contribute enough to get the full match, that’s okay. Work toward increasing the percentage you’re putting in that retirement fund until you at least reach the maximum matching contribution from your employer.

Write down each debt, the balance, the interest rate, and the minimum payment. Seeing everything together can help you decide which debt to focus on first. Then, choose one of these two debt payoff options:

• Avalanche: Pay extra on the highest interest-rate debt first. Credit cards are a good example of high-interest debt; because rates are higher, these debts cost the most over time. So paying them off first may help save more.
• Snowball: Pay extra on the smallest balance first. If you are motivated by quick wins, this may be a good fit for you.

 Either debt payoff option works well; the key is to pick what’s most sustainable for you and how you approach your finances. A reminder: Always pay at least the minimums on all other debts.

When you’re trying to get rid of debt, it can be tempting to think about using savings from your 401(k) or IRA. But taking money out of these accounts before retirement may cost you in the long run. Early withdrawals often come with extra taxes and penalties, which means you end up keeping less than you planned. And permanently removing retirement savings may make it harder to reach your long-term goals.

It can feel overwhelming to plan for your future. A financial professional can help talk you through your options. Don’t have one? Check with your HR department or employer to see if your company’s retirement savings plan offers this service. (Principal can help you find a financial professional in your area.)