PAY OFF DEBT ACCORDING TO INTEREST RATE
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Crushing debt may keep more Americans from putting cash away for their futures. Close to half of Americans (44%) say debt payments are a barrier to saving for retirement, according to the survey. The quickest (and cheapest!) way to pay off your balances is in order of interest rate, highest to lowest. Let’s say you have these three credit card balances:
• Credit Card A: $6,000, 20% APR, $120 minimum payment • Credit Card B: $5,000, 18% APR, $100 minimum payment • Credit Card C: $2,000, 15% APR, $40 minimum payment
Say you have an extra $40 in your budget after your minimums are paid, so you pay a total of $300 a month. By paying these debts in order of interest rate, you would save two months of payments and $570 in interest charges over paying them in order of balance, from smallest to largest. What does this have to do with your retirement savings? The quicker you pay off your balances (and the more money you save doing it), the faster you can start prioritizing your retirement savings. And while $570 may seem like small potatoes compared with some of these other money-saving tips, eliminating debt payments from your monthly budget and redirecting that cash to your investment account can make a huge difference over time.
SAVE IN A TAX-ADVANTAGED ACCOUNT
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Many Americans can reduce their taxable income by saving for retirement. Whether you have access to a workplace retirement account, like a 401(k) or 403(b), or open an IRA with a brokerage firm, saving in a tax-advantaged account decreases the amount of your income that is taxed, freeing up more money for you to save. Say you’re able to save $400 a month in your IRA, for a total of $4,800 per year. If you have an effective tax rate of 20%, that’s $960 in tax savings that can also be funneled into your IRA.
Investing tax savings adds up Here’s how much you would increase your retirement savings over 20 years if you saved $960 a year on taxes by using tax-advantaged retirement accounts and invested these savings.
$19,200
$9,600 annual tax savings
$16,114
$0
$4K
$8K
$12K
$16K
$20K
Contributions
Returns
Source: NerdWallet analysis, compounded annually at 6%
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