Pay Off Debt or Save for Retirement? Which Comes First?

If you are in credit card debt and struggling to get it under control, but are worried about saving for retirement, you’ve probably asked yourself: Do I first pay off debt or save for retirement?  

It’s a good question to ask. 

According to a recent report by the Federal Reserve Bank of New York, Americans owe $930 billion in credit card debt.¹ 

Value Penguin reports…

  • 41.2% of all households carry some sort of credit card debt.
  • $5,700 is the average American household debt.
  • Average for balance-carrying households is $9,333.²

From the stats above, one thing is clear: many Americans are drowning in credit card debt.  

If you’re trying to figure out if you should pay off debt or save for retirement first? Keep reading to find out. 

Pay Off Debt or Save for Retirement? 

Pay off debt or save for retirement
This is like the chicken or the egg question. Which comes first? 

There is plenty of advice out there that says to drop everything and do whatever it takes to pay off your debt. Now. 

There’s nothing wrong with paying off credit card debt as fast as you can. 

But it’s important not to neglect saving for retirement in the process.  

Instead of asking whether you should pay off debt or save for retirement, we encourage you to ask: How do I pay off debt AND save for retirement?

Here’s why…

If you focus solely on paying down debt for the next 5 years, you run the risk of being debt-free 5 years from now, but being behind on retirement savings by 5 full years. 

You will have potentially missed out on 5 years of compounded investment returns had you consistently contributed.  

And, if you have a 401(k), and you aren’t contributing at least the company match while paying off debt, you may have missed out on 5 years of free money. 

After 5 years, you might be debt-free, but you need to play catch up all over again…only this time with your retirement savings. 

On the other hand, it doesn’t make sense to rack up interest and only pay monthly minimums while you contribute to your 401(k) or other retirement funds.  

A Strategy for Success

Pay off debt or save for retirement
When you have limited funds, a family to raise, bills to pay, and a life to lead, how on earth do you pay off credit card debt and save for retirement? 

You need a strategy. A plan in place that allows you to do both. 

Here’s what we recommend: 

  • Pay off high-interest credit card debt first, while saving something for retirement. If you have a 401(k), at least contribute enough to get the company match because that’s FREE money. Automate your savings and have money directly deposited into your IRA, if you have one. 
  • Once you’ve paid off your high-interest credit cards, continue paying a bit over the minimum on any lower-rate credit cards or debt you have. Then, divert more money to fund an emergency savings account. If you want to avoid getting back into debt, you need a rainy day fund. 
  • When you have a decent amount of money in your emergency savings, go back and work on paying off the rest of the debt. Up your retirement savings at this point as well. 
  • When you’re out of debt, now is the time to increase your retirement savings. If you’re able (which you should be without debt weighing you down), max out your yearly contributions. Keep saving money in your rainy day fund as well. Whatever you do, make sure you don’t go back into credit card debt. 

The above strategy might take you longer to get out of credit card debt than you’d like, but you’ll be saving while paying it off.

And you may be in a better financial position.  

If the thought of saving and paying off credit cards and having a life feels like squeezing blood out of a turnip, take a deep breath. 

There are a few things you can do today that may help you pay off credit card debt faster and without sacrificing your retirement savings

#1 Ask Creditors for a Lower Interest Rate

Pay off debt or save for retirement
If this works, it’s a win for your debt and for your retirement savings because it doesn’t require you to divert funds that would go to saving for retirement or throw more money at debt. 

And it could potentially save you a lot of money. 

If you are a long-time customer and have a decent credit score, asking is often all it takes. So, call your credit card companies and see if they will give you a lower rate. 

Even 1 or 2 points may add up to hundreds of dollars saved on interest

Let’s say you have a credit card limit of $5,000 and the card is maxed out. The interest rate is 21.30% and the minimum payment due each month is $138. 

If you stayed at this rate, you would pay off the card in 59 months. 

If you lowered your rate just 1 point to 20.3% and paid the same $138 each month, you’d save about $273 in interest and have the card paid off in 57 months.  

$273 saved in interest might not seem like a lot, but think of it this way: that’s about two regular payments’ worth of savings. 

#2 Transfer High-Interest Balances to a 0% Card or One with a Lower Balance

Pay off debt or save for retirement
If you’re able to transfer a high-interest balance to a card with a much lower rate or 0%, it’s a smart move. 

However, be careful with this strategy

While balance transfers have the potential to save you hundreds, if not thousands, on interest, only transfer a balance you know you can pay off within the low-or-no interest rate window. 

Most low-interest or 0% interest cards come with terms. Typically you have to pay off the full balance within 12-18 months; otherwise, the credit card company will backdate and charge you interest. 

If you can’t pay off the transferred balance in time, you may end up paying more than you would have if you kept the balance on the original card. 

Lee transferred $8,000 from a 18.9% card to a 0% card. 

She was getting nowhere making monthly payments, and, if she transferred the balance, she’d be saving almost $6,676 in interest

The terms stated she had 12 months to pay it off; otherwise, she would be back charged interest. 

She set a plan in place to pay it off in 11 months at $727 a month, just in case something happened and she needed an additional month to pay it off. 

“The first three months I was on track, but then stuff came up, and I needed to use some of the money intended to pay off the balance. So, I paid what I could the next few months–$200, $500–whatever I could,” said Lee.

In December, she had four months to pay it off and a balance of $4,100. 

“I freaked out when I realized I had to pay $1,025 each month for four months if I was going to avoid all that interest,” she said.

“I had to pull back on my retirement savings of $500 a month, and I threw all the money I had at it. Not ideal, because I’m now behind on my retirement savings by $2,000, but I did it.”

Let Lee’s situation be a warning. If you are going to transfer a balance to a lower-interest or 0% interest card, make sure you do not borrow more than you can reasonably pay. 

#3 Make Two Monthly Minimum Payments

Pay off debt or save for retirement
Credit cards typically charge interest on a daily basis. Every time you make a payment, your daily average balance is reduced. 

Making frequent payments throughout the month, instead of waiting until you have a large chunk of cash to pay down, means less interest you’ll have to pay

And you’ll pay it off faster.   

Pay down the minimum each month, and then a week or two later, pay the same amount. 

Let’s say you have a card with a $2,000 balance at 17% interest. It will take you 3.8 years to pay it off paying the $60 minimum and cost you a total of $726 in interest. 

If you make 2 minimum payments each month, or $120, you’ll have paid off the card in 1 year and 6 months and cost you a total of $298 in interest. 

Do this, and you would save $428 in interest and would have the card paid off in almost half the time…

Allowing you to free up that money to tackle another credit card, save more, or spend however you like! 

Not sure where to find the money to make an additional minimum payment? 

Here are 3 ways to find the money fast…

  1. Calculate how much you spend for lunches each week at work. If you cut back from 5 days at $15 per lunch and brought your lunch 3 times a week, that’s $45 extra a week. Multiply that by 4 weeks, and you now have $180 that can go toward an extra payment. 
  2.  If you already pack your lunch, look at how many times you dine out each week or order in. Cut back on that, and you’ll find the money. 

  3. Go through your budget (or if you don’t have one, your bank statements) and see if there are any subscriptions you’re paying for that you don’t use. Paying $50 a month for a gym membership, but you never go to the gym?
  4. Cancel it, and you’ll have $50 extra each month to pay over on a credit card. 

  5. Scale back.Instead of paying $50.99 each month for a streaming service, drop your plan to $11.99. That’s a $39 each month freed up to pay over on your credit card. 

Notice none of these examples has you eating Ramen every meal. And they don’t ask you to stop going out with friends or become a minimalist.  

You’d be amazed how much money you’re spending on certain things, if you just take the time to look. 

Sure, you could sell your car and bike to work, and then use that money to pay off a significant amount on a credit card. 

But most of us cannot or are unwilling to do that. 

Take time right now to see where you can cut back on one or two expenses each month, and use the money saved to make a second monthly payment. 

#4 Don’t Incur Any More Debt

Pay off debt or save for retirement
This may sound obvious, but far too many people pay off a credit card and then rack up debt again. 

Decide to stop the cycle. Now. 

Avoid temptation to keep up with the Jones. 

Create a plan to tackle your debt and save for retirement, and then work the plan. 

#5 Get Help 

Pay off debt or save for retirement
If you’re struggling to pay off debt or save for retirement, we strongly suggest getting third-party advice. 

If you’re hesitant to reach out for advice because you think you have too much debt or you don’t have enough money saved, don’t let that stop you from getting help!

This is your future we’re talking about. 

The sooner you seek expert advice, the higher the probability you’ll be better off financially in the years to come…and in retirement.

In fact, David Blanchett, Head of Retirement, CFP, CFA of Morningstar reported that participants that received expert guidance had as much as 40% more income during retirement versus those who received no help at all

Just think for a moment how 40% more income at retirement may change your lifestyle later in life

Chances are, it would make a significant difference. 

It doesn’t matter how much or how little money you have saved for retirement, or how much debt you are carrying…

A third-party expert may help you create a plan to get out of debt, fund your emergency account, and maximize your retirement savings. 

The sooner you reach out for help, the better off you may be. 

Don’t know where to start? 

Check out our guide : The Different Types of Licenses Financial Advisors Have and What They Mean to You.

Pay off debt or save for retirement

Send Me The Guide!


  3. David Blanchet, Head of Retirement, CFP, CFA, Morningstar 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”



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