Debt occupies part of your monthly budget, leaving you with less to save for retirement. It can also create unnecessary stress in retirement.
Therefore, when you plan for retirement, consider how you’ll manage your debt. Following simple tactics can make managing and paying off debts much easier.
This article will cover a few ways to manage debt before and during retirement and a few tips to pay off debt more quickly.
Three Ways to Manage Debt Before and During Retirement
Here are three tips for managing your debt during and after retirement.
1. Have an Emergency Savings Account
An emergency savings account replaces income and covers relevant costs during unexpected events, like job losses or car accidents. This fund helps you avoid debt before and during retirement.
Aim for three to six months of living expenses in your emergency savings. Consider more if you have multiple dependents.
2. Reduce Your Living Expenses
Cutting spending helps free up more funds for debt payoff.
Create a monthly budget, evaluate your spending, and cut back where possible. For example, you can cook meals rather than eat takeout or eliminate your gym membership by working out at home.
Consider downsizing in retirement. For instance, you could move into a smaller home and sell one of your vehicles. This can reduce or eliminate remaining mortgage or auto loans.
3. Increase Your Income
Boosting your income creates more budgetary room for debt payoff. If you’re still working, you can start by trying to negotiate a raise at work.
Another way to increase income is starting a side hustle before and during retirement. For example, you could:
- Freelance in a skill (writing, graphic design, programming, etc.)
- Find a part-time job with a flexible schedule
- Drive for rideshare or delivery services
Three Ways to Pay Off Debt
So far, we’ve explored a few ways to make debt management easier by creating a financial cushion and freeing up funds in your budget.
Now, let’s dive into a few ways to pay down debt faster.
1. Refinance and Consolidate
Debt consolidation involves paying off several debts with one loan. This streamlines your debt management and helps avoid late fees through accidental late payments.
Debt refinancing entails paying off an existing loan with a new loan at a lower rate to save on interest.
In many cases, you can refinance and consolidate simultaneously. Ensure the new loan’s interest rate is lower than the weighted average rate of your old loans.
2. Perform a Balance Transfer
A balance transfer involves moving one or more credit card balances to another card.
Balance transfer cards have promotional introductory 0% APRs on balance transfers for long periods, usually 12-18 months. This lets you consolidate and refinance multiple cards at 0% interest.
Balance transfer cards typically charge a 3-5% fee on transferred balances, so it’s best to budget for that.
3. Follow a Debt Payoff Strategy
A debt payoff strategy gives you a clear path toward being debt-free. There are two popular strategies to consider:
- Debt Snowball: Pay off debts from smallest to largest balance. Pay the minimum on all but the smallest debt, and put extra toward the smallest until you pay it off. Repeat until you pay off all debts. This helps you gain momentum by paying off that first debt faster, but it may cost more in interest.
- Debt Avalanche: Pay off debts from the highest to the lowest interest rate. Pay the minimums on all the highest-rate debt, and put extra toward that highest-rate debt until you pay it off. Repeat until you pay off all debts. This method minimizes interest expenses but may take longer to pay off the first debt.
The Bottom Line
Good debt management is crucial to peace of mind and a comfortable lifestyle, especially in retirement. Following a few good personal finance habits can make it easier to manage those debts.
Build an emergency savings, cut spending, and increase your income to create more room for debt payoff.
Then, refinance and consolidate debts or perform a balance transfer, depending on which suits your situation better. Follow a debt payoff strategy if you still have multiple debts after doing so.
By being proactive toward your debt, you can enjoy your golden years worry-free.