The Money Mistake That Could Take Years Off Your Retirement

Serious Asian Senior Couple thinking about their Debts with laptop computer.
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Early retirement is the dream, and by investing a large chunk of your income for a few decades, you might be able to retire in your 50s, 40s or maybe even your 30s. But if you make this one massive mistake, you might kiss your early retirement dreams goodbye. 

Holding on to high-interest debt can delay your retirement by years if you don’t manage it correctly. While it might not seem like a big deal to make your minimum payments, high-interest debt can take a lot longer to pay off than you think, and the interest charges compound the longer you wait.

Here’s how debt can delay your retirement and steps you can take to avoid this mistake.

What Exactly Is ‘High-Interest Debt’?

High-interest debt is any debt that is charging a higher interest rate than average. For example, if mortgage rates are around 7% APR but your credit card interest rate is over 20%, then the credit card is considered “high-interest debt.”

Another way to determine if your debt is considered high-interest is to measure it against stock market average returns. If you decide to invest your money in the stock market instead of paying down your debt, you want to make sure you’re earning more in the market than you are paying in debt interest. Otherwise you’re simply losing money.

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According to Macrotrends, the stock market has averaged a 10% return over the last 100 years. If your debt has a 10% or higher interest rate, it is considered high-interest debt.

How Much Debt Do Americans Have (on Average)?

If you have been “adulting” for any length of time, you might have some debt to your name. According to a recent study by Credit Karma, here are the average debt balances by age:

Age range Total consumer debt Credit card debt Average debt payments
18-26 $16,283 $2,781 $198
27-42 $48,611 $5,898 $443
43-58 $61,036 $8,266 $599
59-77 $52,401 $7,464 $548
78-95 $41,077 $5,649 $411

Most Americans have over $10,000 in consumer debt and thousands in credit card debt. These debt balances are also requiring monthly payments of $200 to $600, which significantly decreases monthly cash flow for borrowers.

These monthly payments are crushing your ability to invest more toward retirement, and the interest payments are costing you dearly.

How High-Interest Debt Delays Your Retirement

All of this consumer debt has a real cost on your retirement savings, and can actually delay your retirement by years. If we look at the youngest age group and take the amount they are paying toward debt and instead look at investing it in the market, $200 per month invested at 8% for 40 years turns into over $600,000 at retirement.

The impact is worse for those with high monthly payments and larger debt balances. If you don’t tackle your high-interest debt and keep your debt payments at a minimum, it can cost you hundreds of thousands of dollars by the time you retire. And if you are looking to retire early, debt can actually delay your retirement date.

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Credit cards and other high-interest debts can take decades to pay off if you only make the minimum payments. This can lead to paying more than double the debt balance over the life of the debt. The best way to avoid delaying your retirement and paying tens of thousands in interest is to pay off your high-interest debt as fast as possible.

How To Pay Off High-Interest Debt Quickly

1. Take Inventory of Your Finances

The first step to paying off your debts and investing more is figuring out your current financial situation. This includes taking an inventory of your income, monthly spending, debt payments and current investments. 

You should review your last three months of spending to get an average of how much you spend each month, and on what categories. When reviewing your spending, you can find places where money is being wasted (maybe on subscriptions or miscellaneous spending), and these are great places to begin saving money. The goal of this exercise is to understand your current finances so you can make a debt payoff plan.

2. Make a (Realistic) Budget

Once you’ve taken inventory of your finances, you can put together a budget. But don’t just put random numbers in a spreadsheet. Instead, make a budget based on your current spending habits, and only cut out expenses that you don’t really need. 

It’s better to budget more for spending than you need then to create an unrealistic budget that you can’t stick to. Make sure to include debt minimum payments in your budget to ensure you don’t miss any payments.

3. Create a Debt Payoff Plan

Once you have a budget that you can stick to, put every extra penny toward paying off high-interest debts. You can focus on the debt with the highest interest rate first, or you can pay down the one with the lowest balance.

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The goal is to focus on one debt at a time and only pay the minimum on the others. This helps you quickly knock out one debt at a time, and when it’s gone, it immediately increases your cash flow to pay down the other debts. Do this until all high-interest debts are paid off.

4. Invest More

Paying down your high-interest debts can give you a great return, because you are essentially earning the interest rate that is on that debt. Once you have paid off all high-interest debts or refinanced those debts to lower interest rates, you’ll want to start investing as much as possible.

All the money that was going toward debt payoff and minimum payments can now go toward your retirement and investment accounts. Funding a workplace retirement account or IRA can help you grow your wealth and retire earlier.

Bottom Line

Investing is one of the best ways to build wealth, but ignoring high-interest debt can hurt you in the long run. It’s important to take inventory of your debts and pay down any that have a 10% interest rate (or higher). Putting together a budget and debt payoff plan can help you get out of debt for good and use your money for building wealth after that.

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