Are you financing your past or saving for your future?

According to a 2010 National Institute on Retirement Security, the median retirement account balance for Americans aged 55-64 is…wait for it…drumroll please………….. $12,0001. Cue the depressing music. Sad as it may be to quantify this, I’m sure the fact comes as little surprise to many. But why is this? Can some not afford it? Sure. But for many, they just cease to make it a priority. We simply choose to spend our money on other, more immediate things. If that’s you, you may want to check out our recent post & video on cash-flow management. But I think there’s a much larger elephant in the room. Debt.

In researching for this post, I found no shortage of data on debt. Pretty much everyone agrees we (read “Americans”) have a debt problem. As of Q4 2015, the average American debt-carrying household has $15,762 in credit card debt, $27,141 in auto loans, $48,172 in student loans and a $168,614 mortgage.2 With so much debt and the payments that go along with it, it’s no wonder people can’t save for retirement. But we are not without hope! Having counseled hundreds of people through this very issue, I know that a little focus and discipline can go a long way. Let’s do this.

The first thing you need to do if you’re under a pile of debt is to get out from under it. In order to do that, you need to know what you spend and how much money you can commit to accelerating your debt payments. If you need help with that, refer to the link above on cash-flow management. Once you know how much extra money you can throw at your debt. It’s time for the debt snowball! So what’s this debt snowball? I’m glad you asked!

The debt snowball is the process of paying off your debts from smallest to largest. When you pay off one debt, you roll that payment into the next debt and so on and so forth and keep going until you’ve paid off all of your non-mortgage debt. So why do we start with the smallest debt and not the one with the highest interest rate? Because we’re humans and we need little victories. It takes people 18 to 36 months to get through this process. If we don’t see immediate fruits to our labor, many of us will give up. Would you save a little interest if you did it the other way? Maybe. But let’s be honest. If we were such disciplined mathematicians, we wouldn’t be in the situation in the first place would we?

Now if you’ve gone through the hard work of paying off all of your non-mortgage debt, I’m sure you don’t want to all back into it. First up, build a decent emergency fund. I’d say at least $10k. This is your insurance policy and serves to protect you from that unexpected set of tires, transmission, and trips to urgent care. DON’T SKIP THIS STEP! If you start saving for retirement before you have this in place, you’ll be taking a premature distribution at the first sign of trouble. But do it right and you’ll be saving money like a champ and on target for a prosperous retirement.

-Mike Macco

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