Before Getting Out of Debt, We Started to Save for Retirement

Young couple having fun at quarry pond
Every one of us has had "aha! moments." Epiphanies. Days when we reach a crossroads and realize that we have to make some changes. For the next two months, we're sharing moments like those in our Life Stage Lessons series: Real stories straight from the financial lives of our DailyFinance contributors about times when they realized they were due for a serious course correction. So read on, learn from our mistakes, and get inspired to improve your relationship with your money.

Getting out of debt was an all-consuming affair for my husband and me. Every extra cent was going toward paying off our student loans in the hopes that we could be debt-free in less than two years.

We were following all the financial advice we could get our hands on, and everything we read said we first needed to save up a small emergency fund, which we did. Next, we were advised to put any and all extra money toward our debt and to wait until we were debt-free to save for retirement. And for a while, we followed that advice to a T. We didn't realize there was a flaw until several months into our debt payoff process.

Free Money Left on the Table

My husband and I were both working full time, and both of our employers offered a 401(k) match. We barely knew the definition of a 401(k), and so we took little notice of our companies' offerings. But one day, my husband did some research on a 401(k), and what he found had us both rethinking our decision to wait until we were out of debt to save for retirement. And here's why.

When a company offers to match an employee's retirement contributions, it is really saying, "We want to give you free money." My husband's company offered a 100 percent match up to 3 percent of his income for each paycheck. My company had a similar offering -- totally free money we were both missing out on.

Compound Growth

When money is contributed to a 401(k), it becomes subject to compound growth, which allows that money to make money babies. And those money babies make more money babies, and so on. Once we learned how compound growth worked, we realized the key to retirement success was the duration our money had to grow. Even if we tried playing catch-up and contributed the same amount to retirement ten years in the future vs. now, our end result come retirement age would be much different.

After weighing the pros and cons of contributing to retirement before our debt was paid off, we decided it was worth it to start contributing right away. Our debt payoff plan would only be delayed by a couple of months, and in the meantime, we were being given free money and reaping the rewards of compound growth. If you're waiting to take advantage of your employer's 401(k) match until you're out of debt, it may be time to rethink saving for retirement now.
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