Paying Off Bills Vs. Saving For Retirement
Let me begin by saying that one shouldn’t consider the debate between paying off bills and saving for retirement as total opposite beliefs. The truth is that for long term security you’re going to need to take care of both as time goes along because you never know how long you’ll live once you retire and the last thing you want is to be saddled with a lot of debt and not enough money to pay for everything.
With that said, let’s look at this discussion from some practical terms. The difference between paying off bills you have now and deciding to put money away can be drastic. It’s hard to see for most people because the numbers can be overwhelming, so we’re going to put it in terms that hopefully make it easier to understand with a little example.
We’re going to use $100 as the base number to start with. Then we’re going to compare an average credit card interest rate against a typical income earning rate if you put money away for your future.
We’re going to do a calculation of credit card debt by saying that you average $100 a month that you spend on a card that has an interest rate around 14% annually. What that means by the way is that every month the interest amount being applied to your balance is around 1.24%, which your mind will say doesn’t look all that bad. Each month, when you get the bill, you pay $20, which is the minimum amount the credit card company is asking you for. If you did that for 3 years, and we assume that the minimum payment amount never went up, you’d end up accruing a debt after that period of around $2,880.
Now, assume that you decide one day to put $100 a month away in a money market account, and you were lucky in that it was paying out at an interest rate of 6% annually. That averages out to around .88% per month, for comparison’s sake. If you paid $100 a month into that money market account for 3 years, you’d end up with a positive income amount of around $220. Yes, sorry to break it to you but that’s about all you’d be generating (I hope you started saving at a much younger age).
As you can see, there’s a major difference in the debt you’ve accrued going against the money you’ve earned. Now, the reality is that your minimum payments probably went up after you reached a certain dollar amount, probably around $1,000, and that $216 is added onto the $3,600 you put away, so the difference would be a bit closer, but you will still accrue more debt than money you’d earn, and that’s only talking about the one credit card. If you have other credit cards you’re increasing your debt while you’re still only accruing a relatively small amount of revenue.
Once you see numbers like that, you realize how important it is to not only pay down your debt, but to try to pay more than the minimum when you can, even paying off your card each month. You still want to put money away, probably more than just the $100 a month if you can afford it, but getting rid of current debt should be the most important thing you do for your long term peace of mind.