This post was contributed to Leisure Freak by personal finance writer Tanya Singh who  knows this topic of loan payoff vs retirement savings. 

Are you constantly in a battle to decide which one to choose between the two – paying off loans or saving for retirement?

Using money to pay off loans is a good choice. But so is taking a chunk of money from your monthly income and saving it! The former allows you to build returns and generate investments. While the latter saves you money to pay off personal loans, home loans, and budgeting loans.

So which option to choose? Read on to weigh out the advantages and disadvantages of both.

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Consider This Before Prioritising Loan Pay Off or Retirement Savings

Holding any debts is always a bad habit, and if you ask the bunch whether debt paying should be prioritised or retirement savings, the majority will say debt. Whether card repayments, loans, or mortgages, clearing the debt is always a good idea.

Those believing in “pay yourself first” have their own sets of points that work for them. But, depending on your situation, ask yourself the following questions and judge what works the best for you.

• Do You Have Emergency Funds?

Not having emergency savings is an expensive mistake for people of every age. What if your landlord suddenly raises the rent? The economy is never stable, what if you lose your job?

There are several unpredictable situations you can land yourself into. Having money on hand can be a huge relief. You should always have at least three to six months’ worth of salary in your savings account.

Therefore, if you have enough savings, only then consider to repay your loans.

• Do You Have Any Other Debts?

Other than your ongoing loan, consider rethinking whether you have debts like credit cards. Sometimes the interest would be higher on these than the returns you get from investing. By repaying such debts, your finances get a boost.

• Are You Paying Into a Pension?

Pension savings is one of the most important factors to consider when you start working. When you contribute to pension schemes, you benefit from tax relief. There are several workplace schemes available as well where an employer pays in the pension. This is a cost-effective way to retirement savings.

Should You Pay Loan First?

Loan repayment is one of the most painful tasks for any individual every month. Therefore, some people prefer paying it off early. However, is that a smart choice?

 For some, the early payoff is beneficial. But it is a choice that needs to be heavily analysed before making a firm decision. Here are some advantages and disadvantages to consider:

Advantages:

• You can save a lot more on your monthly income, which leaves you with more cash.
• Your overall interest bill is reduced.

Disadvantages:

• The biggest downside of paying off your loan in one go is that you would not have the funds to aid any emergency. If you are thinking of repaying your loan first, consider your current savings in mind.
• You will be faced with several early repayment charges (ERCs), depending on the lender.

Should You Focus on Savings and Investing?

If your future plans are grand, it is only sensible to have financial security by either saving or investing with a sensible strategy. But every coin has two sides.

Savings is great, and so is investing (depending on your needs). However, there are advantages and disadvantages to it. Let us take a look:

Advantages:

• Investing in shares causes your money to grow faster than simply opening a savings account.
• You do not lose your access to cash in case of an emergency.
• The flexibility of selling your investment is available, whether mutual funds or purchased shares.
• Retirement accounts provide tax relief on your contribution. In the end, it boosts your retirement savings.

Disadvantages:

• Investment returns vary on the options you select. Even if the long-term return is good, there are short-term losses you will need to bear.
• You cannot access your retirement funds in your retirement account until you reach your retirement age.

Pay Off Loans or Save for Retirement?

There is nothing wrong with paying a loan before time and maintaining a good credit score. Equally, saving for your retirement is also a good plan! So ultimately, the choice is yours. Take a decision depending on your financial circumstances, priorities, and goals.

Thank you Tanya Singh for sharing this timely topic, prioritising Loan Payoff vs Retirement Savings. With all the challenges we face economically in our day to day, we still must create and implement our best plan for our future selves.

 Author Bio: 

Tanya Singh works as a Content Marketer at LoanTube – a loan comparison marketplace where borrowers can connect with multiple lenders via a convenient and transparent application. She writes about topics related to personal finance and loans helping her readers in making smart decisions when they need to borrow. Yoga brings her inner peace and strength, and travelling brings her joy (besides her work of course).