Is it better to save or pay off debt?

Myth: I should pay off all my debt before contributing to a 401(k).

Thrivent financial advisor Colin Mildred understands the desire to be debt-free. And he’s not surprised that some people believe they should eliminate debt before saving in a 401(k).

“We all want to get that monkey off our back,” says Mildred, of Grand Prairie, Texas.

But paying off debt shouldn’t come at the expense of saving for retirement, especially if your employer provides a match for your 401(k).

“It’s like leaving free money on the table if you don’t do your part and contribute to your 401(k),” he says. “It’s important to do as much as you can to get the free money.”

Mildred also doesn’t want you to underestimate the power of compounding interest.

“The sooner you start saving, the more time your investment has to grow,” Mildred says. “Every year, even every month you wait, is one less opportunity to reap the benefit of compounding.”

At the same time, Mildred says, don’t underestimate the impact debt can have on your life. That’s why he suggests sitting down with a financial advisor to look at your overall financial picture and together create a strategy to help you tackle both debt and saving.

A good starting place is to review what kind of debt you have and consider the best options for handling it. It’s not a one-size-fits-all equation.

For many people, a home loan is usually the biggest debt, followed by student loan debt, Mildred says.

While throwing extra money toward the principal to pay off the loans faster will save on interest and eliminate payments sooner, he says, both of these debts tend to have lower interest rates. It could make sense to put the additional dollars into an investment that may provide a higher return.

“This is where you need to sit down with a calculator and really look at the numbers,” Mildred says. “It might make more sense to save if you can.”

However, if it’s credit card or other consumer debt, you may want to pay it down faster—and create a plan of action so it doesn’t rack up again.

“We live in a world where you can push buttons and have stuff at your door the same day,” he says. “Consumer debt, usually because of the interest rates, will likely grow faster than most investments.”

Ultimately, it’s up to you to determine what you want your relationship with debt to look like. But it shouldn’t get in the way of saving for your retirement.