Working to pay off massive amounts of debt is the story of our generation, and like most 20-somethings, I’ve been sending a portion of my monthly income toward student debts since graduating from college. Somewhere along the way, paying off debt became such a priority that I stopped contributing to my savings or retirement funds.
As a full-time freelancer, it’s an easy mistake to make. After all, without an employer to deduct taxes and 401(k) savings, your income is entirely your own to manage. Even if you do have a full-time job, chances are you’re still faced with tough financial decisions regularly.
Which is how the idea of “pay yourself first” came up. I can’t take full credit for it — it’s something my dad originally said a few months back when he asked me if I was saving for retirement.
My answer at the time? Sort of. But I was mostly focused on paying down my student loans. He shook his head and said, “You should always pay yourself first.”
Saving and paying down debt: Finding the right balance
This brought up some questions for me. Was I putting my income in the right places? Maybe not. Should I be saving more? Although it’s true that debt costs more the longer you have it, it’s also true that time is your biggest ally when it comes to saving and investing money. Because most of us will never have the several millions of dollars in cash needed to retire comfortably in our 60s, we’ll instead have to sock away what we can and invest to make up the difference.
This all comes back to the question of how to strike the right balance between paying off your debt and saving money. I still don’t have all the answers, but here are some of the solutions I’ve come up with.
Paying yourself first: How to do it right
Paying yourself first is all about making the financial decisions that benefit you the most. These will be different for everyone. Someone drowning in debt with a decent savings plan in place might choose to allocate more funds to their debt; someone with little-to-no retirement savings and more manageable debts should probably consider building up savings. Whatever your debt-to-savings ratio looks like, here are some strategies to consider.
Pay down your debts
When deciding which debts to pay down first, be sure you know how much each one is actually costing you. Generally speaking, credit card debt tends to cost the most money because many cards come with high interest rates. But this can also be true of certain types of student loans, which can have varying interest rates and start accumulating interest before you even graduate.
If you have a lot of different loans and your debt is starting to feel unmanageable, you might even consider debt consolidation to combine loans. With all your debt in one place, it’s possible you have even more expendable income than you realized, which can, in turn, be put toward your other financial goals — like saving for retirement.
Grow your retirement savings
Retirement is an important goal to work toward, especially if your employer doesn’t offer a 401(k) match and you have to come up with the money on your own. Because your income might change from year to year, the best way to think about retirement savings is as a percentage of your income. A good rule of thumb is to save at least 10-15% of your annual income toward retirement.
Another thing to keep in mind when saving for your retirement is that the sooner you start, the better. Calculate how much 67-year-old you might need annually and work backward. Incomes between $30,000 and $40,000 are generally considered fairly modest (especially when you factor in inflation) — but you can work toward this goal or an even higher one by starting to save a little bit from every paycheck now.
One way to do this is by opening up a Roth IRA account. These accounts allow you to deposit up to save up to $6,000 per year towards your retirement. Although this may not make up your entire 10-15% annual contribution, it’s a great place to start. The best part about these accounts is that withdrawals are tax-free because you pay taxes on the money you contribute upfront. With a 401(k), contributions are pre-tax, which means you're on the hook for taxes when you make a withdrawal.
Another tip to keep in mind with IRA accounts is that you typically have until tax day to complete your contributions for the previous year. Running behind on your 2019 retirement goals? You’ve got until July 15 to change that.
Build an emergency fund
Having an on-hand emergency fund is another important part of paying yourself first. Because this fund can help cover just about any financial stress you can imagine (medical bills, vet bills, unemployment) it’s an important part of your financial well-being. Start your emergency fund by deciding how much of your weekly or monthly income you can live without, and put it toward your savings goals. If and when that rainy day comes, you’ll be glad you did.
Get creative about saving
Saving money doesn’t have to be a painful process. There are a lot of money-saving strategies and apps out there that can help you, whether you’re looking for a way to put aside more money every month or just need some help paying your bills.
The trick to becoming a successful saver is all about getting creative and finding solutions that work for you. This might mean budgeting more carefully, or even taking on a lucrative side hustle for the extra cash. It might also mean stashing away any extra income that comes your way now and again, such as your tax return or birthday funds. However you decide to meet your savings goals, the peace of mind you’ll get from having a financial plan in place will make all those sacrifices feel worth it.
The final word on paying yourself first
Having a better financial plan in place all starts with your mindset. Start thinking about paying off debt as buying back your financial freedom. Find a way to make your bills more affordable, and only take on the expenses you need to live comfortably. After all, you’re going to need more expendable income and a good credit score if you ever plan on doing things like taking out a mortgage or buying a car. Your chances of being approved for these loans and others will only go up when you have less debt in your name.
Most importantly, don’t make the mistake I did. No matter how much debt you have, make sure you’re paying yourself when it comes to saving the money you’ll need down the road. Investing in your future is one of the most important investments you’ll ever make. Don’t wait too long to get started.