Should I pay cash for a major purchase or finance it?
Pay cash if the item you’re buying depreciates rapidly. That includes nearly everything you’re likely to bring home – including appliances, computers and cars. Why pay interest on something that loses value over time? (Your cash isn’t earning buckets of money in the bank anyway.) Plus, paying cash reduces the risk of buying more than you need. If you don’t have enough cash to buy it brand-new, then buy it used.
Finance it if the purchase is a necessity and you don’t have the cash, you qualify for low-cost credit, and you’ll pay back the balance as quickly as possible. You may also want to charge it if you need to build a credit history.
Should I pay off loans or save for retirement?
Pay off the loans if the rate you pay is higher than the rate you can earn on investments – and you are saving enough for retirement to get an employer match. For example, paying off a credit card with an 18-percent interest rate is like earning an 18-percent return on your investments – a guaranteed return you can’t match anywhere else. After that, you can direct the money you had been using to pay off your debt toward your short- and long-term savings goals, including your retirement savings goals. Once you retire your debt, it will also be easier to focus on living within your means.
Save for retirement to take advantage of employer matching contributions as well as the magic of compounding. The earlier you start saving, the less money you’ll need to set aside to reach your
retirement goals, leaving some room in your budget to chip away at your debts. If you skip saving entirely for a few years while you pay off debt, you could give up free money and valuable tax breaks that you can’t make up later. Say your employer matches your 401(k) contributions 50 cents for every dollar, up to 6 percent of your pay; that’s a guaranteed 50-percent return. Investing to get your employer’s full match should be your top priority. You should also take advantage of your options for tax-advantaged savings. You are eligible to put away $5,000 per year in a traditional or Roth IRA ($6,000 if you’re 50 or older) and $16,500 per year in a 401(k) plan ($22,000 if you’re 50 or older).