What if all the money you spent each month on credit card payments was being invested in your retirement plan? How much faster could you reach your retirement goals?
In a recent article on Businessinsider.com, Jenna Goudreau takes on these questions. The article entitled, “Why Credit Card Debt Can Derail Retirement Savings” discusses advice offered by Investment News writer, Darla Mecado. Mecado points to high consumer debt, including mortgages and credit cards, as an often “overlooked” factor that takes a “significant bite out of workers’ ability to save.”
If you’re increasing debt faster than you’re increasing savings, you’re losing ground. Currently, workers debt grows more rapidly than their retirement savings according to Mecado. She cites HelloWallet’s analysis, which showed that workers had 9.2 trillion in savings plans and 4.2 trillion in debt. But, here’s the growing problem. From 2010 to 2011, 64 percent of participants in defined contribution plans were increasing their debt at a speedier pace than they were adding to their retirement accounts. That’s a nearly 40 percent increase from the 2006 to 2007 levels of 46 percent of participants. So in four years, a majority of participants have gone from saving faster to getting in debt faster. If these trends continue it could result in a full-blown financial crisis.
Most retirement savers focus more on plan type, investment allocation and contribution rates than on how to eliminate debt so that those dollars can go to their retirement plans. Think of it this way. If you have $10,000 worth of credit card debt and you are paying 10 percent interest on it and you have $10,000 in retirement savings growing at 7 percent, it’s like having an investment that is losing 3 percent.
Before you get started redirecting your credit card debt to your retirement plan, make sure you have at least $1000 to $2000 cash in an easy-to-access emergency fund. Some financial experts advise you to have 6 to 12 months of living expenses in accessible savings, but that’s your call. This will keep you from using your credit card if you have an unexpected expense. Then, begin to pay down your cards aggressively. Once you get the balances to zero, take the monthly sum you were paying toward your credit card debt and put it into your retirement plan each month.
Depending on how many cards you own, you may want to close a few accounts, but keep most of them open. By keeping the accounts open, you show unutilized available credit, which positively impacts your credit score.