Many Austin clients at Capital Budget Strategies, LLC, Austin’s best Financial Coach, ask whether they should pay off debt or contribute to their employer’s retirement program. The answer usually depends on two questions.
Besides a mortgage and Government-subsidized school loans, Capital Budget Strategies, LLC is uber anti-debt. Our Finanical Coach usually recommends paying off all credit cards, car loans, personal loans, etc. before investing. But there are exceptions.
Begin by answering two questions:
QUESTION 1: What percentage of your take-home pay goes towards paying off debt, based on minimum monthly payments? This is called your income to debt ratio. Debt is anything on which you make monthly payments. The recommended income to debt ratio is 15% or less.
As an example, if you bring home $3,000 a month and pay $400 towards debt each month, your income to debt ratio is 13%.
QUESTION 2: Does your employer match retirement plan contributions?
Most private employers match between 3 – 6% of an employee’s annual income. For example, suppose you make $50,000 a year and your employer matches 5% or $2,500. If you contribute an annual total of at least $2,500, your employer will “match” your contribution by adding another $2,500. Any contributions you make above $2,500 will not be matched.
Based on your answers, we suggest the following:
If your income to debt ratio is below 20%, we suggest taking advantage of your employer’s match but contribute only up to the match amount. This is free money, so take advantage of it. Then funnel all other available cash to pay off debt.
If your ratio is 20% or more, put all your efforts and money into paying off debt and work on retirement savings later. At this point, you are paying more for interest on your debt than the benefit of making investments.
Try to pay more than the minimum payment amount and forgo extras like eating out, new shoes and spending too much on birthdays and holidays. A part-time job would also help and Austin is filled with them!
Of course, these are only general recommendations. Recommendations based on your actual financial situation may differ.
For only $149, Capital Budget Strategies, LLC, Austin’s Best Money Coach, will provide an honest, unbiased opinion regarding your finances. In approximately 4 hours, we will change the way to think about, save and spend your money – plus build a livable household monthly budget.
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