Debt that keeps you from saving is trouble

On the Money

Your Money

October 15, 2006|By Gail Marksjarvis | Gail Marksjarvis,Chicago Tribune

Do you have a problem with debt?

If debt is keeping you from saving for retirement, you are on your way to a struggle. In fact, if you are in your 30s and saving less than 12 percent of your pay, you are likely to fall short of what you'll need in retirement, said Charles Farrell, a Medina, Ohio, financial consultant and tax attorney.

In a recent article in the Journal of Financial Planning, Farrell tells other members of his profession that even so-called "good debt" - like a mortgage - is a problem if it interferes with the ability of people to save adequately.

The bottom line, Farrell said, is that people need to invest 12 percent of their pay each year between age 30 and 65. If they do, they should be able to accumulate about 12 times their salary by the time they retire, and generate about 60 percent of their pre-retirement income to live on each year.

If mortgages, car payments, credit cards and other debt get in the way early in life, people will have to save more than 12 percent to catch up - a difficult undertaking. For example, if an investor saved only 5 percent of pay from age 30 to 39, he would have to increase it to 18 percent for every year after 40.

The good news in all of this: If you have employer matching payments in a 401(k) plan, saving won't be as difficult. With a 4 percent match, you could invest 8 percent of your salary in the 401(k) and count on your employer to get you to the 12 percent threshold.

Farrell's advice is to think carefully before moving into a larger, costlier home, and to scale back your car preferences - perhaps buying used cars, rather than new ones.

If a family has one car loan instead of two, it would free up a significant amount of money to be used for savings, he said.

And eliminating credit-card debt will make a difference.

Farrell notes that if a person eliminates $15,000 in credit-card debt, with an 18 percent interest rate, it would free up $4,105 a year to save.

Eliminating debt might seem overwhelming, but if you put together a plan and are disciplined, you can make a difference. Try Internet calculators to understand what debt is doing to you - not only your ability to save, but also your ability to buy what you want.

If you try the "How much do I owe?" calculator at, you will see that $9,000 in credit-card debt at a 18.9 percent interest rate would take 30 years and $26,215 in total interest to pay off if you made only minimum payments - starting with $180.

Although many people resist budgeting, financial planners say understanding where your money is going is essential. Otherwise inertia sets in and you don't realize that you are spending money on items that aren't even fulfilling to you.

If you don't create a formal budget, consider writing down every purchase you make during the next couple of weeks - everything from a trip to the vending machine to the clearance rack.

After two weeks, look at that list, along with your latest credit-card bill. Ask yourself which of the items truly gave you pleasure. Cut out those that didn't, add up their value, and devote that amount as extra payments on your credit-card bills.

If you have good credit and want a lower interest rate on an existing card, call your card company and request a lower rate. They often will oblige you. According to, the average on platinum cards is currently 10.17 percent.

As you pay down debt, credit counselors say you will have better control if you have only two credit cards. They also suggest paying off the card with the highest interest rate first.

You can also leave a message for Gail MarksJarvis at 312-222-4264.

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