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Should I Pay Off Debt or Save for Retirement?



Scenario 1: What to do when you’re sandwiched

Question No. 1: My wife and I just turned 37. We have only $12,000 saved for retirement, which is in a 401(k) at the school where my wife works. I’m an independent auto mechanic, so I don’t have one of those.

Our son graduates from high school in a couple of years, and we don’t have much saved for his college. Meanwhile, my wife’s dad died last year and her mother is living with us. (No mother-in-law jokes here, she’s a nice woman and a wicked cook.)

My wife still has around $18,000 in student loans to pay off, and we still have $11,800 on our credit cards (like, seven of them) from a bad patch I went through when I couldn’t find work.

So my question is simple but hard: What do we save for first?

Do we sock money away for our son’s college? Pay down those student loans? Pay off my credit cards? Or kick out my mother in law? Kidding about that last one. Seriously, my wife would kill me.

— Jon in Minnesota

Howard Dvorkin, CPA answers…

Welcome, Jon, to the sandwich generation. That term describes middle-aged Americans who have to pay to raise their children and care for their parents. As you’re learning, it adds a lot of stress to a family’s budget.

In fact, I’ve coined the term hamburger generation to describe your situation more precisely: You’re not only sandwiched between competing expenses, you’ve been ground up by debts of your own.

Here’s what I’d recommend…

1. Consolidate or even get rid of those student loans

You mention that your wife works at a school. She just might qualify for what’s called student loan forgiveness. This concept comes from the federal government, and like anything governmental, there are hoops to jump through.

Even if that doesn’t work, the government has other programs that can greatly reduce your wife’s monthly payments. They have cumbersome names like the income-contingent repayment program, but can help you figure out which one will save you the most.

Bottom line: The federal government offers help with student loans, so take advantage of it.

2. Consolidate your credit card debt (maybe)

How would you like to reduce your total credit card payments by up to 30 or even 50 percent? If you’re paying late fees, how about getting them to stop? If that sounds too good to be true, it’s not. It’s called credit card debt consolidation. All your credit card balances are rolled into one, and through using a debt management program, you can save big.

How do you know if a DMP (as it’s called) is right for you? Through a painless and enlightening process called credit counseling. Essentially, a certified professional will review your income and expenses, study your debt situation, and make recommendations. Best of all, this consultation is free.

Bottom line: When you have five figures of credit card debt on more than five cards, you probably qualify for some amazing savings.

Can’t find the cash to start saving for retirement? can help you find the best solution to get out of debt faster.

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3. After you’ve paid down debt…

Because the interest rates you pay on your debts are most likely higher than the interest rates you’re earning in a retirement account, you want to take care of steps one and two first. Then you want to really pare down your expenses. Again, credit counseling can help you find some dollars you probably didn’t know you have.

As for your son’s college, I answered a similar question a few months ago: Do I NEED to Go To College? Not everyone does, and many successful people have attended community college and lived at home, saving money until they could transfer to a university.

Bottom line:
You and your wife can make this work, Jon, and you don’t have to evict your mother-in-law!

Scenario 2: You have high-interest credit card debt

Question No. 2 : After years of working part-time (I was laid off in 2014), I got a good full-time job with benefits. During the bad years, I ran up $11,000 on a half-dozen credit cards. I’m looking forward to paying those down, but I also want to start saving for retirement.

My wife says we should probably split whatever extra money my new job will bring in, but since we’re both in our early 50s, I’m wondering if stashing more in an IRA is a better option. Any advice?

— Andrew in Rhode Island

In this case…

In your case, Andrew, the answer is simple: Pay off those credit cards.

Let me explain it like this: Saving for retirement without paying off your current debts is like trying to cure your cancer with chemotherapy while bleeding to death from a flesh wound. You need to solve the most pressing problem first, or you won’t survive long enough to get to the second.

As a CPA and financial counselor for more than two decades, I get asked all the time: “How do I save more for retirement?” When I ask if they have any credit card debt, they sometimes answer, “Sure, but I’m making the minimum payments.”

Here’s the thing: The interest on your credit cards far outstrips what you’ll earn in a retirement account. The average interest on those cards as of today is around 15 percent. Does your retirement accounts pay you 16 percent? If the answer is no, then pay off those credit cards first.

Of course, there’s a caveat: If you have a 401(k) at this new job, take advantage of it, especially if it offers a generous matching contribution. Until you pay down those credit cards, contribute only as much as the match.

Find the fastest way to get out of debt, so you can start saving for retirement.

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