Balancing debt and savings: How to prioritize financial responsibilities

Man and woman discuss how to close the gap between what they've saved and what they need to retire comfortably.

As retirement nears, it becomes even more important to close the gap between what you've saved and what you may need to retire comfortably.

But how do you determine where your focus should be? Do you knock out lingering debt, or increase your savings rate while continuing steady debt repayments?

Achieving retirement readiness requires a balanced strategy. It’s important to create a plan tailored to your financial situation that accounts for saving, reducing debt, and managing credit.

Talk to a financial professional.

Carefully examine where you stand financially, then devise a plan to help achieve or maintain your goals in retirement.

"Work with someone who can objectively look at your plan and tell you what you can do to be successful," says Donald Hammond, MBA, CFP®, executive vice president and financial professional at Maritime Financial Group in Sheboygan, WI.

Focus on cash flow.

"It all comes down to cash flow," Hammond says. Figure out how much you have coming in versus what's going out, and adjust where possible so you have more money for retirement and paying off debt.

Balance savings and debt.

It's easy to exclusively focus on debt, but savings should be top-of-mind too. "Building liquidity and paying down debt is ideal," Hammond says.

Continue to contribute to your retirement accounts while paying down debt. If your employer offers a matching contribution on a 401(k) or 403(b) plan, take advantage of that to help maximize your savings and retain enough money to pay off debt.

Prioritize debt reduction.

Start early and chip away at it. "Don't wait until there is a serious debt crisis to begin prioritizing and paying down your debt," says Hammond, who recommends prioritizing debt using these steps:

  • List your debt from the highest interest rate to the lowest.
  • Pay off the highest-interest cards and loans first, paying more than the minimum each month.
  • Continue to at least make minimum payments on the rest.
  • Work your way down until everything is paid off.

Also look at consolidating to a lower-interest-rate card to reduce the monthly interest charge. "This means more money goes toward paying down principal," Hammond points out.

Use credit cautiously.

How you manage credit depends on your financial situation, Hammond says.

  • If you carry credit card debt: "Just because you have a box of chocolates doesn't mean you have to eat them all at once," Hammond says. "If you're in the hole, don't keep digging. Work toward paying off your credit card debt."
  • If you're essentially debt-free: Continue to use credit. Not using it may damage your long-established credit score and make it difficult to obtain financing. Hammond recommends charging a little bit each month and paying your balance in full at the end of the month.
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