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2 Things You Must Do Before Saving for Retirement – The Motley Fool



Lack of retirement savings is fast becoming a crisis in this country. One in three Americans has less than $ 5,000 saved for retirement, and one in five has no savings at all, according to Northwestern Mutual Survey.

If you're among that group, you should consider boosting your retirement savings, but there

1. Create an emergency fund

Nothing derails your finances quite like an emergency. If you do not have any savings, you can have a loan or charge for your credit card that you can not pay back at the end of the month. If you fall into that cycle of debt, it can be difficult to get out, and the money you otherwise could have saved has to go to interest on your debts.

 Woman holding envelope full of money.

Image source: Getty Images

You can avoid this by proactively saving for these unanticipated events in an emergency fund. Open a separate account or keep the money in your existing savings account. You should have three months' worth of living expenses, at a minimum, but six months is even better. If you would like, you can save for retirement and your emergency fund at the same time. But give the edge to your emergency fund. Once you have your goal, you can get more of your extra cash toward retirement each month.

2. Pay down high-interest debt

There's a debate about whether it's best to pay down high-interest debt before you save for retirement or whether you should be at the same time. It's not an easy decision. The longer you pay for your credit card, the more you're going to pay in interest. That's a guaranteed loss, and depending on how much you pay and what your credit card's interest rate is, it could amount to thousands of dollars. But by delaying retirement savings to pay down debt, you're missing out on months or even years when money could have been growing, and when it's time to retire, you'll have a smaller nest egg to show for it. [19659002] The right way to act this dilemma depends on your situation. If your employer offers a 401 (k) match, you shouldn't skip this unless you can't afford to contribute to it. Contribute enough to take advantage of the free money and then put the rest toward the debt repayment. Look for ways to reduce your debt, like transferring a balance to a card with a 0% APR or consolidating your debt with a personal loan. This may help you get your debt under control more quickly.

If your employer doesn't offer a 401 (k), it doesn't really matter, it's a little trickier. If you only have a small amount of high-interest debt, you may be better off throwing all your extra cash at it for a month or two to knock it out. Then, you can save money on savings once your debts are paid off.

But if you have a lot of high-interest debt, consider paying it down and saving for retirement at the same time. You could split your money evenly between the two or whichever one is higher for you.

You may have some lifestyle changes to free up extra cash, like traveling and dining out or picking up a side hustle. If you're struggling to find a plan that works for you, consider consulting a financial advisor who can give you personalized advice. They may be able to come up with a plan you hadn't thought of.


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