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Make sure you’re not making this big mistake when it comes to saving.
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The biggest money mistake Marlyn Privette sees her clients making is not saving money while paying off their debt. Privette is a money coach with a following of more than 287,000 followers on TikTok. She told MarketWatch Picks that she often encounters people who feel like they can’t start saving and investing for retirement until they’ve paid off their debt.
Research backs that up. Goldman Sachs Asset Management recently found, for example, that student loans can result in a 19% dip in retirement savings. And, as Bankrate concluded in its 2023 annual emergency savings survey: “Growing debt is hurting savings.”
Though it can be tough to both tackle debt and save, Privette says, for most of you aiming to grow long-term wealth, you need to start saving for emergencies and investing for retirement as soon as possible. The good news there? Many savings accounts, for example, are paying more than they have in 15 or so years (see some of the highest-paying savings accounts here).
“Most of the time they don’t even have a solid strategy to get out of that debt,” she says of her clients. “They end up not investing ever, and by the time they get out of debt, they don’t know how to invest. They’ve missed out on that time to really receive compound interest.”
In short: Even while paying off your debt you can — and should — save, Privette says, adding that your first savings goal should be to save $1,000 in an emergency fund. Other pros also say it can be smart to save both for emergencies and retirement, even while you’re tackling debt. Here’s how.
Make sure you have an emergency fund.
Privette recommends having an emergency fund set up, typically even before you start investing your money just in case you need it. “Getting an emergency fund is super helpful, so that if something were to happen you’re not in financial duress,” she says, adding that you can start with just $1,000 socked away, with an eventual goal of 6-12 months of essential expenses. (See some of the highest-paying savings accounts here.) “At that point it’s putting that extra money towards investments,” she says.
Tori Dunlap, a financial influencer and the founder of Her First $100k, a financial education platform, echoes Privette’s advice. “The number one priority, even before debt payoff, should be your emergency fund,” she says. But even while you’re building your emergency fund it’s important to make sure you’re paying at least the minimum balance on your debt, otherwise you could ruin your credit score.
Evaluate your debt — and make a plan to pay it off.
If you have debt, you need a plan to pay it off. “Navigating debt can be a multifaceted challenge, especially when faced with various types of loans like student loans, credit card debt, and personal loans,” says Hazel Secco, president and founder of Align Financial Solutions.
One economical path forward is to focus on paying off debts with the highest interest rates first, like credit cards, auto loans, and other consumer loans, while always paying the minimums on all other debts. By comparison, debt that typically has lower interest rates, like student loans and mortgages, may be able to be paid off more slowly, as you ramp up retirement savings.
Having trouble repaying debt? Privette says budgeting helps you better understand where your money is going and can free up cash to pay down debt, save and invest, if you’re in a spot to do that.
Start investing with your 401(k).
If you aren’t sure how to start saving, an easy way to chip away at your savings goals is to start putting money in your 401(k), Secco says. If your employer has a match, you’ll be earning more as you invest over time. Even if you have other high-interest debt, you should still invest in your 401(k) up to the match percentage so you aren’t losing on out what is essentially free money.
“Prioritize contributing to your 401(k), especially if your employer offers a matching program,” she says. “This can significantly enhance your long-term financial outlook.”
Automate your investments.
Investing is a long game, says Dunlap. “People think saving the money is going to be enough,” she says. “Save for your short-term goals but we actually have to invest to build our wealth.”
Automating your savings will make this even easier, Dunlap says. Start with a small amount of money taken out every month around the time you get paid and build that up over time.
“It doesn’t have to be a lot of money,” she says. “All you can do is $20 a month and if you build it over time, you are in a better financial position.”
Instead of picking individual stocks, prioritize investing in ETFs, or other funds, that include a variety of different stocks, she says. Dunlap herself invests in Vanguard’s total stock market ETF (VTI) and its total international stock ETF (VXUS).
