If your income has been hit by the coronavirus pandemic, now may be a good time to find ways to stretch your finances a little further.
This is especially true if you are balancing multiple debts, you’re anticipating less money coming in and you’re not sure how to prioritize your bills.
If you are regularly investing in a retirement account, whether that’s a 401(k) or an IRA, one solution could be to lower your contribution amount and redirect that money toward paying off debt. While it’s not ideal, doing so temporarily can free up some much-needed cash to address immediate priorities that take precedence from time to time.
“Diverting some retirement savings to paying down credit card debt can make a lot of sense right now,” Brandon Renfro, a certified financial planner in Marshall, Texas, tells CNBC Select.
Below, Renfro explains when it makes sense to lower your retirement contributions to pay down existing debt and what to do in order to make sure it’s worth it in the long run.
When should you lower your retirement contributions
“Given how shaky things are economically, I think putting some focus on paying off credit cards is prudent,” says Renfro.
This is particularly true if you have a credit card balance you were planning on paying off, but now your job is less secure and you’re concerned about a tighter budget.
To get by, you could consider making only the minimum payments for a few months, which might make sense if you’re fairly confident your income will increase again in just a short time. But if it looks like you’ll be paying the minimums for a while, it could cost you more in the long term if you’re paying high interest charges on your debt each month.
Before the recession, many consumers turned to balance transfer credit cards like the Citi Simplicity® or the Wings Visa Platinum Card to pay off debt over a period of six to 21 months with zero interest. But now that banks are making it harder to get credit cards, fewer consumers have access to this choice.
In this case, if you have the option to use the money that you’re putting toward retirement to knocking out your debt, there’s little immediate cost other than missing out on a few months’ retirement savings, and the saving on interest could make it worth your while.
However, Renfro cautions against making this choice without a plan.
“You’d not really be doing yourself much of a favor if you simply run the balance back up,” he says, adding that it’s also important to know when and how you’re going to build your retirement back up after paying off your credit card.
How to bounce back when you’re finally debt-free
You should have a plan for directing money back into your retirement savings at the same rate as before, if not higher, to make up for the temporary pause. Without one, Renfro argues, “you run a very serious risk of simply not picking it back up.”
His strategy for rebuilding your retirement is rather straightforward: Take advantage of the habits you built while paying off your credit card debt by simply redirecting any extra funds you were putting toward your credit card to the amount you were putting away for retirement.
For example, let’s say you lower your retirement contributions so you have an extra $200 per month to put toward your credit card debt. If your minimum payments are $160 every month, then this could allow you to make $360 monthly payments until your credit card is paid off.
Once you’ve successfully paid off the card, instead of returning your retirement contribution to its previous levels, Renfro suggests seeing if you can afford to apply that extra $160 that was part of your debt payoff budget toward building your retirement back up.
