6 Tricks to Save for Retirement While in Debt

Most financial pundits recommend investing at least 10% of your salary to save for retirement. That’s easy to do when you don’t have to pay back student loans, buy groceries, and still find a to pay the electric bill. Investing 10% might seem impossible, but it’s easier to achieve than you think.

It might not feel like a money tree is growing in your backyard, but you will be surprised at how you can find money where you least expect it. Seriously, it’s possible to immediately improve your financial footing and invest 10% for retirement at the same time.

Making loan payments and regular monthly investments is a balancing act, and these tips and tricks can help you develop a better way to pay off debt while investing for retirement. Paying off debt and saving for retirement isn’t an either-or proposition, you can do both at the same time!

Maximize Your Employee Benefits First

Do you want to know the easiest way to get a raise without asking your boss?

Matching 401k contributions.

Most employers offer a monthly 401k match. If your employer matches the first 6% of your income, you’re already investing 12% of your income each month. If you can swing it, contribute 10% of each paycheck.

Every 401k contribution is withdrawn before your take-home pay is deposited in your bank account. This trick basically “forces” you to save for retirement because you’re more likely to spend your paycheck than invest a portion of it.

After you get used to having a slightly smaller paycheck, you can adjust your monthly spending to live within your means, so you don’t have to decrease your monthly 401k contributions later.

In addition to 401k contributions, your employer might also offer a retirement pension (lucky you!) or student loan repayment benefits. If they offer student loan repayment benefits, invest the difference to help reach the 10% mark too.

Boosting your income is usually the best way to increase your cash flow because it’s almost always easier to make more money than to cut expenses. Workplace benefits are essentially free money as you don’t have to work harder to utilize them.

Prioritize High-Interest Rate Loan Payments

When you need to reduce monthly expenses, paying off your high-interest debt should be your first focus. A good rule to follow is to use your extra income to pay back loans with interest rates higher than 8% instead of investing your cash.

After you make your monthly 401k match, use your extra income to repay high-interest debt before investing more of your income.

Why should you focus first on loans higher than 8%? Eight percent is the historical annual return of the S&P 500 index which tracks the performance of the 500 largest companies in the United States. You’ll save more in interest than you can potentially earn by investing.

Personal loans and credit card balances are the two most common debts to have an interest rate above 8%. You might also try refinancing these loans to negotiate a lower interest rate too.

Make extra payments on these loans to pay them off sooner. You can easily save hundreds of dollars by making more than the minimum monthly payment. Even if you can only pay an extra $50 every month, you’re still accruing less interest.

Once you pay off these high-interest loans, it’s time to start investing your extra income because the potential investment gains are higher than the savings from additional loan principal payments.

Remember that time is your greatest asset when it comes to investing. The more you invest today means the less you have to invest later to catch-up. Later may not happen until you finally get out of debt a few short years before retirement.

Rethink How You Spend Your Take Home Pay

Another easy way to find more money to invest is to rethink your monthly spending. We live in a world where instant gratification is the primary reason behind most purchases. The only problem with this is that you probably spend more money than you realize.

For example, don’t go out to eat as frequently. Food is probably the most flexible monthly expense if you find yourself going to restaurants more often than the grocery store. Instead of spending $15 per entrée, you can make the same dish at home for a fraction of the price.

After food spending, you should look at your monthly subscriptions. Can you cancel your cable tv or another streaming service that you don’t really use as often as you anticipated?

By spending less now, you have more money to spend later without the worries that come with living a paycheck-to-paycheck lifestyle.

Diversify Your Portfolio with Alternative Investments

Although you can invest the entire 10% of your salary into your 401k for simplicity, you should also consider investing in a few other assets to diversify your portfolio.

For example, you might invest any income above your employer 401k match in an Individual Retirement Account (IRA) or non-retirement account so you can invest in ETFs or individual stocks that are cheaper than your 401k offerings and have potentially more growth potential.

To hedge against stock market volatility, you might consider investing in several stock market alternatives that can earn an 8% to 12% annual return as well:

  • Crowdfunded real estate
  • Peer-to-Peer loans
  • Launching your home business

These investments require a longer investment commitment to earn a more profit, so this can be a great place to park capital you don’t plan on using for at least the next three years.

Don’t Spend Your Pay Raises

As you climb the corporate ladder, you’ll receive regular pay raises. Instead of increasing your monthly spending on consumable items, invest your pay raise or put it in a savings account. Just because your take-home pay increases doesn’t mean you have to spend it immediately.

Do your best to keep your monthly expenses as low as possible instead of succumbing to “lifestyle inflation.” It’s okay to no longer live like a cash-strapped college student and you can splurge a little along the way, but remember your two primary financial goals are to get out of debt and retire on-time.

Use any pay raise or cash windfall to achieve these goals first.

Challenge Yourself to Invest More Than 10%

Remember, 10% is the minimum you should invest each month to retire on time. You should invest more as you become debt-free for your retirement and non-retirement financial goals. If you’re not sure if you on-track to retire early, plug your retirement goals into a retirement calculator. You’ll quickly see if you’re on track or if you need to make any adjustments.

Being proactive about getting out of debt and saving for retirement gives you immediate and long-term peace of mind. Life is a balancing act. The sooner you seek balance, the easier it is to achieve your goals.

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Joseph Hogue

Joseph Hogue

Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business. You can find more of his investing tips at My Stock Market Basics!

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