Pay Off Credit Card Debt or Save For Retirement?

Sep 21

That was one of the questions asked of me in Bloomington, IL this past weekend when I spoke at the McLean County Family Child Care Association conference. The all-day conference was sponsored by the Snyder Insurance and NSI, a division of West Bend.

Rex Dachenbach, from the West Bend Mutual Insurance Company spoke about the importance of family child care providers purchasing professional business liability insurance to protect them against the risks of running a business. He talked about differences in insurance coverage from one company to the next and pointed out that the difference in price between the highest coverage ($1 million per occurrence, $3 million aggregate) and the lowest coverage ($300,000/$600,000) was less than $25 a year. So it makes sense to purchase the highest coverage you can get.

I spoke on Record Keeping, Contracts, and Money Management/Retirement Planning. The question about whether to pay off credit card debt or put more money towards retirement was not a simple question to answer since I didn’t know the details of the provider’s finances.

The considerations are these: The provider is probably paying +20% interest on her credit card and no investment in the stock market can promise even half that rate of return. Therefore, it might seem that the best bet is to put the money towards retirement. However, paying off a credit card debt is no guarantee that the provider will not run up a credit balance in the future. In addition, each year you wait to contribute to your retirement you give up a lot.

Here’s an example that shows the power of compounding interest on your investments: If you are age 35 and start investing $3,000 a year (earning an average of 8% a year) you will have $339,850 when you reach age 65. But if you wait one year until age 36 before you start investing your retirement earnings will be $27,952 lower. Waiting one year to invest cost you almost $28,000!

Therefore, my advise was to do a little of both; use some of the money to pay off the credit card debt and some to invest for retirement.

Have you faced a similar financial tradeoff decision? What did you do?

The local newspaper, the Pantagraph, carried a story about the conference.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.quoteinspector.com/images/credit/credit-cards-cash/