Owe Less and Save More

Paying a lot of credit card and mortgage interest might be preventing you from saving enough for retirement. Look for ways to charge less and pay a lower rate on your credit card balances. Try pre-paying your mortgage so you’ll have less debt hanging over you at retirement.

Peg Downey, who teaches workshops on “The Seven Stages of Money Maturity,” recalls a conversation with a 40-something woman who wanted help with retirement planning, but was utterly blasé about paying down her $60,000 credit card debt. “So what if I die with debt? I have no dependents,” the woman said. “As long as I can make my monthly payments, what difference does it make?”

The short answer: a world of difference. “A heavy debt load is often the result of inattentiveness to your overall financial picture,” notes Downey. “It siphons off money that could go toward funding your retirement.”
I often see that people don’t realize they’re overspending. They’re putting money into retirement plans, but they’re also accumulating credit card debt.
Overspending without realizing it

Even with rising incomes, many women find themselves dealing with big, competing financial priorities — from owning a home to paying for college tuition to funding retirement. If you don’t have enough savings to pay for all of these, you could easily find yourself carrying a sizable credit card balance. In fact, households with credit card debt owe an average of $15,788 on their cards, according to creditcard.com.

“I often see that people don’t realize they’re overspending. They’re putting money into retirement plans, but they’re also accumulating credit card debt,” says Downey. “And unless they change priorities, they don’t have much to put toward important financial goals.”

Here’s how to navigate the parallel paths of paying down debt while increasing savings — the surest path to staying out of debt in the future.
Know where your money goes

Your first move should be learning exactly what you’re spending money on. Then you can look for ways to cut expenses and avoid taking on more debt. The Wells Fargo Small Steps to Retirement Savings Worksheet will help you find easy ways to make little spending changes that can really add up.
Ramp up your savings

Guarantee a steady savings habit by automatically transferring a designated sum from your paycheck into a savings account each month. Once you have a savings cushion, you’ll be less likely to lean on your credit card for unexpected expenses.

Don’t worry that this emergency savings isn’t earning much interest.

“In the past, my advice was not to stick money into a savings account earning basically nothing if you’re paying 15% or 18% on a credit card,” says Gerri Detweiler, personal finance editor for Credit.com and co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Card Crisis. “But if you’ve depended on a credit card as your alternative to a savings account, that’s a risky strategy.”
Know what you owe

There are a variety of strategies for paying off your credit cards, but they all start with this step: List your cards in order of their interest rates, from highest to lowest, along with the amounts you owe on each.

When it comes to lowering credit card debt, “the biggest hurdle is having the courage to put it in writing,” says Detweiler.

Your next step? Getting your credit card debt down to zero, consider using one of these three methods:

  1. Switch to a lower-rate card. If you have excellent credit and can qualify for one of the lower-rate cards, you may want to transfer your high-interest balances to that card. Look for a card that won’t charge a transfer fee. See if your current card issuer can offer you a better deal. If that doesn’t work, check out the best offers around, which you can find at CardRatings.com and Credit.com.

  2. Pay off the card with the highest interest rate first. You’ll pay the least amount of interest with this method, so it’s a smart money-management move.

  3. Pay off the card with the lowest balance. Setting your sites on the easiest debt to pay off packs the biggest emotional benefit. This strategy is what popular TV and radio money-show host calls the “snowball effect,” because by continuing to pay off the smallest debt, you build momentum.
Move on to your mortgage

Once you’ve succeeded in lowering your credit card debt, you’ll want to turn to your mortgage. Since mortgage debt is likely the biggest debt you have, paying it off faster now will be a huge help in lowering your monthly expenses when you retire. Most lenders let you prepay your mortgage without owing a penalty.

Detweiler suggests two possible strategies:

  1. Add an extra amount to your principal every month. Most lenders have a box on your monthly stub where you can note that you’re prepaying the mortgage and including more money than normal. You should be able to find this prepayment option online, too. By adding an extra $250 every month on a 6%, $500,000, 30-year mortgage, you’ll shave about five years off the loan and save over $122,000 in interest.

  2. Create your own biweekly plan. With a biweekly mortgage, you are essentially making an extra mortgage payment each year. But you can do this on your own if you don’t have a biweekly mortgage. Simply divide one mortgage payment by 12 and add the figure you come up with to each monthly payment. By making biweekly payments on that same $500,000 mortgage, you’d save $118,000 in interest and cut the mortgage by five years.

Key Points:

  • Look for ways to reduce your spending by using the Wells Fargo Small Steps to Retirement Savings Worksheet.
  • Switch to a lower-rate credit card, pay off the highest-rate card you have first, or pay off the card with the lowest balance.
  • Add extra money to your monthly mortgage payment to pay off the loan faster and save thousands in interest.

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