Why You Shouldn’t Sacrifice Your Retirement To Debt

Debt frequently becomes a major factor in what kind of retirement you plan on having. Lots of people dream of retiring early, taking dazzling vacations to the orient, tropical island destinations, or tours of European castles. Unfortunately, many of these dreams are dashed to bits by people’s unexpected expenses.

For those of you with kids, you might want to cover their ears. I am about to bust out that dirty word that people don’t like to hear when it comes to personal finances: budget.

Budgeting does not need to be a huge deal, but even if you have a regular budget including retirement and savings, it is likely that you are still “dipping into the savings”. And this nasty little habit could cost you your yearly trip in retirement, age 60-90. When you think about it like that, do you really want to give all of those exciting trips or other adventures up? And don’t think that you will die quick and escape that boredom either. Even people who have lived rather unhealthy lives are being kept alive for many more years now courtesy of many new medications that are being prescribed.

But getting back to debt….Debt is the unwanted, unexpected, and most importantly, unnecessary result of the lack of a plan for these expenses inside the budget. This is not the simple debt of 50 dollars extra on clothes once a year. These are big bills that you just aren’t planning for.

Large Tax Bills: Excise and Property Taxes (and sometimes income taxes for the unemployed)
Medical Expenses: People likely will need operations; if you have insurance that has high deductibles or copays, you should be saving for these unfortunate events in advance.
Maintenance: Cars, Houses, and other high-value assets require maintenance that can be pricey. Lenders encourage homeowners to expect an extra percent of their home’s value will be needed for basic upkeep. This doesnt include home improvements.

Diversify Yourself

Diversification is the standard when it comes to being safe in the stock market or other kinds of investing. This area of personal finance is no different. Provided that you have reasonable interest rates that are somewhere in the neighborhood of 6-14% and you have large amounts of debt (say over 100K) but without the funds to pay for it, you probably will want to consider diversifying your excess funds.

Retirement First

Just because paying off debt is a “guaranteed return” doesn’t mean you should shirk your retirement. If your company has any match, you want to take advantage of that free money. It is likely the best deal for your dollars. If you don’t, consider a split:

• retirement
• emergency (never to spend) account
• long-term expenses that you know will come up.
• debt paydowns (one bill at a time to get the snowball effect).

Reevaluate Frequently

You will want to reevaluate this plan frequently, but be disciplined during the interim. Great ideas of when to update this plan and incorporate it into your budget are either once a year or whenever your household gets a raise or whenever you payoff a bill for good. These are triggers that can change your life and being flexible with this plan will help you control these changes adequately.

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