Pay Off Debt or Save for the future?


The decision to pay off debt or save for the future is a decision many of us have either faced in the past or are currently facing. As a financial advisor, I’m always quick to point out the long-term benefits of investing as early in life as possible. However, when it comes down to an either/or decision of paying off debt or investing, my answer quickly shifts to “it depends”.
Instead of going through all the different scenarios of this question, I’d like to layout a simple 5-step plan that will not only answer the question of paying off debt or saving first but also several other questions when it comes to saving and investing. It’s not all-encompassing for every scenario but following these steps would work for many people.
(Full disclose: One of the first financial books I read was Dave Ramsey’s “Total Money Makeover”. I have a few minor disagreements with his book but much of my thinking today can be traced back to what I learned from his book almost 20 years ago. If you’ve read or followed Ramsey, some of what I write below will sound familiar. If you haven’t, I’d highly recommend his book as a good starting point for budgeting, saving, and investing.)


1. Budget

As tedious as it sounds, writing a budget is essential for everything that follows. Take an hour to gather all your expenses for the last few months to get an idea of where your money is going and how much disposable income you have available. Once you’ve established a budget, a quick 15-minute review each month is more than enough to keep yourself on track. This can be done the old-fashioned way with a pen and paper or a budgeting app like PocketGuard, Mint, or YNAB (You Need A Budget).

2. Establish an emergency fund

Building an emergency fund is critical to your financial success. It won’t make you rich, but it will give you a buffer in the all too likely scenario that an unplanned event occurs and sets you back financially. The money should be readily available in an FDIC insured checking or savings account and be enough to cover 3-6 months of expenses.


3. Take advantage of any employer match

If you work for a company that offers an incentive match in their retirement plan, take it. Many companies will match dollar for dollar up to 3% of your income if you contribute to the retirement plan. This is free money, and you should do the minimum contribution to get the full match. If you’re unsure if this benefit applies to you, ask your employer’s HR person. If you don’t have this benefit, skip to step 4.


4. Debt Snowball

This step is entirely focused on getting debt-free (except for your mortgage) as soon as possible. I prefer the debt snowball approach. Here’s how it works. Write down all your debts except your home mortgage and put them in order from smallest to largest balance.

Loan Balance Minimum Payment
Credit Card $1200 $25
Personal Loan $2500 $50
Car Loan $8500 $200
Student Loan $28,000 $500

Since we did a budget in step 1, we know how much disposable income we have available to apply to the debts. Let’s say we have $1000 available after all expenses and making all our minimum payments above. We take that $1000 and apply it to the credit card. The credit card is fully paid off in month 2, so now we take that $1000 plus the $25 credit card payment and add it to the $50 we’re already paying to the personal loan. The personal loan is fully paid off in month 4 and we roll all those payments to the car loan and by month 11, the only debt remaining in the student loan, and thanks to the snowball effect, we’re now paying $1775/month towards the student loan ($1000+$500+$200+$50+25=$1775). With this aggressive approach, you’ve paid off over $40,000 of debt in roughly 2 ½ years!

5. Save for Retirement

Now things get fun. The only debt you have at this point is a mortgage. It’s likely at a low rate and should offer you some tax benefits, so continue making your minimum payments.
You should now strive to contribute as much as possible to your retirement. This can be done either through your employer’s retirement plan or through a Traditional or Roth IRA. This is the point that I would recommend most people reach out to a Certified Financial Planner™ professional to assist them moving forward. Not only will a CFP® professional be able to help you determine how much to save for retirement, but will also be able to assist you with all other aspects of financial planning: investment management, college savings, estate planning, insurance, etc.

So, there you have it, a relatively simple 5 step approach to get your financial house in order. Keep in mind that reaching step 5 is just the beginning of planning for your financial future but the sooner you can reach step 5, the more likely you are to be successful with your finances moving forward.

Brad Lupkes

Brad Lupkes, CFP®
Financial Advisor
Phone: 712-472-2538




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