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Paying for the Past While Saving for the Future

Making decisions about what to do with money you don't need for basic living expenses can be complicated. You may struggle with whether it's better to pay down debt or save for retirement. How can you decide?

It's important to your overall financial security not to have a mountain of debt, especially in this shaky economy. But there is also a good case to be made for investing the money, or at least some of it, for your future.

Each person's situation is different, and you'll need to weigh a variety of factors:

  • How much debt do you have?
  • What kind of debt is it? Mortgages and student loans may have relatively low interest rates and be tax-deductible, making them less burdensome than higher interest, nondeductible debt, such as credit cards.
  • What interest rate are you paying on the debt?
  • Does your employer offer a retirement plan with matching contributions?

In most cases, the answer will not be to choose between paying off debt or saving for retirement, but how to balance doing some of each.

Secure Your Future

It's important to start saving as soon as possible, because once you've passed up a chance to contribute to a tax-advantaged retirement plan, you can't get it back. Every year, you're allowed to contribute only so much to an employer-sponsored retirement plan and to a traditional or Roth IRA. Once the deadline passes for each tax year, your opportunity goes with it.

Many employers that offer a 401(k) or similar retirement plan also offer matching contributions. If you don't contribute at least enough money to your retirement plan to earn the full matching contribution, you turn down free money. Worse yet, that money and your missing contribution can't grow tax-deferred over the long term.

You can try to make up for lost opportunities by making extra contributions to your retirement plan later, but you can't get back the free money you passed up or the value of time in helping your money grow. Time to allow for long-term compounding is one of the most valuable elements in any investment portfolio. Consider this: $2,000 – with no additional contributions – invested for 30 years at a 7% annual return grows to more than $16,000.*

As the saying goes, time is of the essence. Don't put off saving for retirement, because you probably can't afford to lose the advantage of long-term compounding.  We can help you make the difficult choices about how best to apply your extra money to your goals. Contact us today.

* Rate of return shown for illustration only; it does not represent the return of an actual investment. Your returns will vary.

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