Is Debt Derailing Your Retirement Plans?

When people think about debt, they often consider the more immediate problems related to it.  Current issues related to making ends meet, as well as strain on relationships, can obscure the far-reaching effects that debt can have.  Rather than only thinking of how debt is affecting you in the short term, you should also consider the long-term effects of debt.  One of the surest ways to derail your retirement plans is to have debt.

Is Interest Working Against You?

One of the biggest problems with debt is that compound interest is working against you.  Compound interest can be a great thing — if you are earning it.  If you are paying it, though, that is your money going straight into someone else’s pocket.  Instead of working on your behalf, building up a retirement nest egg, your money is working for someone else, without providing you with a benefit beyond the privilege of borrowing.

Another problem is that the interest on many kinds of debt is higher than what you are likely earning in your retirement investment account.  Credit card interest can be especially high.  If you are earning 8% on your investments, but paying 19.99% interest on your credit cards, your earnings will be more than offset; you’ll come out behind.  Paying off your debt as quickly as possible can ensure that your money is working for you — and you’ll have more of it to put to work for you.

Retirement Plans: Will Debt Drain Your Fixed Income?

When looking at your retirement plans, it is important to engage in sound money management practices.  This includes trying to reduce your obligations by as much as possible before you retire.  Any obligations you have will place demands on your income, which is likely to be fixed after reach your retirement age.

Many retirees end up downsizing, living with a smaller income.  If you still have debt during those years, it can have a real negative impact on your lifestyle.  It’s best to pay off what debt you can — including your mortgage — before you retire.  A solid plan to be out of debt can mean fewer demands on your retirement income, leaving you free to spend more of your money as you wish.

Planning to Get Out of Debt

Now is the time to plan to get out of debt.  You should start as soon as you can, paying off your debt so that it doesn’t drain your wealth for the future.  The longer you are in debt, the more you will pay in interest — and the less your money will work for you.  Take an honest look at your finances and determine ways to find more money in your budget to pay down your debt as much as possible.  You can do this by cutting expenses from your budget as well as looking for ways to earn extra income.

Combining these two actions can help you pay off your debt quicker.  Once you are out of debt, you can concentrate on building your wealth, for now and for your future.

Janet writes for Credit, Eh, a blog about responsible credit use and personal finance.