Save for retirement or settle credit card debt?

If you’re working with a restricted budget, it may be difficult to decide between contributing towards your retirement savings or settling a portion of your debt.  

We have a look at how you should handle this situation with particular reference to credit card debt, and we find out which is the optimal use for your hard-earned money.

Tip: If your credit card debt is dominating your budget, consider debt consolidation – click here.

In an ideal world, contribute to both

Lizl Budhram, advice and product strategy manager at Old Mutual Personal Finance, says that you should ideally contribute towards both your retirement savings and credit card debt.

She explains that credit card debt is expensive because it attracts some of the highest interest rates. Therefore, it’s a good idea to pay this off as soon as possible.

A similar level of urgency applies to saving for your retirement, since this will allow you to take advantage of compound interest in the long run. 

“When it comes to retirement savings, starting earlier is more important than starting big. The contributions you make towards your retirement should be increased over time. It’s important to start while you’re young, even if you can only afford minimum contributions,” says Budhram.

It makes sense therefore to meet your monthly repayments for your credit card debt, and contribute what you can, however small the amount, towards your retirement fund.

READ MORE: What if you don't have enough saved for retirement?

If you have to choose  

If you don’t feel that you will be able to meaningfully contribute to both, it would be prudent to tackle your credit card debt first, Budhram notes. You can delay your savings goals, as much as it’s not ideal, but you should never ignore your debt obligations.

“Once your credit card debt has been eliminated, your income will be freed up and you will have removed the risk of defaulting,” says Budhram.

“You will have strengthened your ‘financial discipline muscle’ and you can now use this habit to make your money work harder for you, by investing in your retirement,” she says.

Find out which savings and investment opportunities are available to you – click here.