milestone in life. Retirement is one of those milestones. Although it is certainly a sound recommendation, there are some instances in which other things must be prioritized above credit card payments.
To make the best decision for your financial circumstances, take a look at some of the advantages of paying off credit cards vs. preparing for retirement provided by Ubiquity, a leading 401k savings and retirement plan provider.
Advantages of Paying Down Your Credit Cards Before Retirement
Credit cards are particularly difficult to deal with, as they tend to come with the highest interest rates of any debt that most people have. Because of this, some of the most notable advantages of paying off your credit cards before retirement include:
Freedom from compounding interests: Once you have used a significant portion of your credit limit, it is very difficult to come down from. The high interest rates can leave you paying on a card for several years without ever seeing a zero balance.
Focusing your financial efforts toward paying down your credit cards will remove this burden from you in your retirement phase. Additionally, when you pay down a credit card faster – meaning at a higher payment than the minimum, which hardly touches the principal balance – will reduce the amount of compounding interest that builds on your account.
Healthier finances: Credit card debt is a difficult type of debt to cope with for several reasons. One of them is how it sneaks up on you – at first, it is just an account that supplies you seemingly limitless funds. Then you cross that critical threshold where it seems that your payments have tripled overnight. These payments can severely damage your financial stability when you’re not ready for it – and even when you are! Eliminating such surprises from your life post-retirement will help you to sustain stability.
Benefits of Saving for Retirement Before Paying Down Credit Debt
Saving for retirement is essential to securing financial stability for your future. You can’t depend only on Social Security benefits or any other external help, you need to contribute to your retirement as well. That can mean having to prioritize your retirement over other financial obligations including eliminating credit card debt. Some advantages of putting your retirement plan first include:
- Contributing to a 401K: The more funds you have available to put into your 401K, the better for your post-retirement financial security. Diverting those funds to your credit card payments instead will only solve a single, temporary problem over the whole of your life in retirement.
- Money that you put into your 401K is pre-tax, whereas payments toward credit cards are not. This serves to reduce your adjusted gross income, and along with it, federal taxes. With a lighter tax burden, you may be able to kill two birds with one stone and pay toward your credit cards with the extra funds!
Both paying down your credit card debt and contributing to your retirement savings are important financial habits to adopt early on. Still, depending on your financial circumstances, one route may be healthier for you than the other. Consider the advantages and disadvantages of each route and determine what financial plan is best for you.