Pay off Debts Now!
Kevin O’Leary, one of the financial experts on the popular show shark tanks gives some prudent advice on how to retire without a mortgage. His council includes paying off all your debt by age 45 to increase the amount you will have by age 65 when retirement comes around.
It can be difficult when debt is compounding to get everything (incl. credit cards, mortgages and student loans) paid off by age 45 – however, consider how much harder it will be when you are living on a limited retirement income and trying to pay off compounding debt.
Even more important to understand is that while debt grows exponentially each year that you have it; investments are usually slower growing than the economy and inflation. The typical retirement portfolio grows at 6 or 7% per year. At 7% per year, your investments won’t double for about 10 years. And then over the next 10 years it will double again. Student loan debt doubles at about the same rate. While credit card debt will compound at a rate of 13-19% or more. Even if you can’t make the goal work for you to get your debt down significantly right now, you should start working towards it, O’Leary says. He comments that you can make your own investments grow by “contributing to your own future through prudent, low-cost investments. That way your money will compound into a solid financial base for retirement.”
Save and Pay off Debt
Compound interest in action
To see just how powerful compound interest can be over time, let’s look at a hypothetical example. Say you’re 30 years old and have nothing in savings. You can’t contribute much right now, so you’re saving just $50 per month. This $50 per month could end up helping you save quite a bit for your future, as you can see. Taking that magical age of 45 (when you should be debt free) and starting to save at that time, you can see that it makes about $10,000 less than if you start saving in your 30’s.
|Age||Total Savings When Contributing $50/Month, Starting at Age 30||Total Savings When Contributing $150/Month, Starting at Age 45|
Can’t Spare the Savings?
A lot of people in their early 30’s are still living paycheck to paycheck. Consider ways you can cut back to save just a little each month. Whether it is switching from cable to streaming services, stopping a Prime membership for months that you don’t use it or just cutting back on the times per week you are eating out. You should also consider cutting back on additional extra curricular activities per month; such as movies and other entertainment.
Find this graph and additional details on saving and paying off debt at Fool.com.
Or check out our article on how you can start saving in your early 20s and 30s to have your own home.