Save Up Or Pay Down?

Do you save for the future or pay down debts?

When Bill Robbins of Ohio, who’s leased to an expedited fleet, has a little extra money, he puts it toward debt. “It’s hard to find a company where I can get steady enough pay to do anything,” says Robbins, who has a wife and three children.

His solution is the common one for owner-operators who have the good fortune of some disposable income but the headache of figuring whether to use it for paying debt or saving for long-term goals.

That solution is also the simple one in most cases, especially where there’s high-interest debt. Say you’re sitting on credit card balances bloating to the heavens at 19 percent interest. You would need a surefire investment that yields more than that to justify not paying down debt. (And if you know how to nail 20-plus percent after-tax rates of return, you might as well sell your rig and retire as an investor.)

There are other reasons, though, for reining in debt. You don’t want to tarnish your credit rating by carrying huge balances – whether credit cards, auto loans or other debt – for years at a time or by failing to make payments when freight hits a slump or fuel spikes. If you’ve rolled over credit card debt into a home equity loan to take advantage of the lower interest and tax deductions, you could be putting yourself at risk of losing your home. Also, while there is a time and a place for borrowing, you’ll never arrive if you’re leveraged to the gills. Give yourself some breathing room.

That being said, saving for retirement isn’t something to put off forever. If you’re steadily retiring debt, consider a small start for retirement. Maybe $100 a month drafted from your checking account into an Individual Retirement Account. Not only does it get you in the saving habit, but because it becomes tax-deferred income, it reduces your tax bill.

This brings up the one possible exception to the knee-jerk response to high-interest debt. If you have a wife whose employer offers a 401(k) retirement plan, make sure she’s using it. Many plans match employee savings at 20 to 50 cents on the dollar; some even match dollar for dollar. Plus, the whole wad grows in a mutual fund or other investment of your choice. And, like an IRA, it’s tax-deferred income.

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Even if you have no access to a sweet 401(k), talk to your accountant if the debt vs. savings choice confuses you. You should be able to strike a comfortable balance between the two that positions you for success today and security tomorrow.