It’s never too early to start saving up for retirement, but if you have bad credit, you may not know how to juggle your financial problems with a smart savings plan. The average amount of money saved up for retirement for working families in the country is only $5,000. With the amount of debt increasing and wallets getting tighter, it’s understandable that so many people aren’t working to save money for retirement. The good news is that you can still build your savings for retirement, even if you have bad credit. Here’s how you do it.
Balance Paying Off Debt With Saving for Retirement
The challenge for people with bad credit who want to save enough for retirement is to find a perfect balance that allows them to pay off debt as well. For low-interest debt, such as student loans, car payments or mortgages, it’s best to pay the monthly minimum on time. While you won’t be able to cancel that debt quickly, you’ll at least build a positive credit history and avoid any negatives or missed payments that could lower your credit score. Paying the minimum on these accounts will also help free up your cash so you can contribute to your retirement.
Fund Your Retirement Account
Next, make sure you commit to regularly contributing to your retirement account. If you don’t have a retirement plan, look into the different types available through your employer. In many cases, you can have your retirement contributions taken out of your paycheck automatically, giving you an easy way to set that money aside. Some plans may offer tax benefits that could help you save even more money. Here are the most common retirement plans available:
- 401(k): Employees can set up this popular retirement account through their workplace and have payroll automatically deduct up to $19,000 of their pre-tax income per year, or $25,000 per year if they’re older than 50.
- 403(b): A 403(b) is the nonprofit version of a 401(k) account offered for employees in public service, such as teachers or police officers.
- IRA: This retirement option allows people to contribute up to $6,000 per year, or $7,000 if older than 50. Taxes are deferred until you withdraw the money during retirement.
- Roth IRA: The Roth IRA allows you to pay the taxes upfront and avoid being taxed when you take withdrawals. These accounts have income limitations. You must make less than $137,000 if single or $203,000 if married.
Lower Your Taxable Income
Another money-saving tip that could help you keep more of your hard-earned cash is to lower your taxable income.The best way to lower your taxable income is to contribute more to your retirement account. Retirement contributions help reduce your taxable income and put you in a lower tax bracket. This strategy could give you a smaller tax bill at the end of the year or even help you get a bigger refund back. Use a tax refund to help make a dent in some of your debt to give you more disposable income each month.
Ask Your Employer to Match Retirement Contributions
Next, look for additional ways to maximize your contributions to your retirement account. If you’re pushing your budget to the max with paying off debt and making a small contribution to your retirement, look to your employer for help. Some companies pledge to match their employees’ retirement contributions. This way, you can focus on paying off more debt and putting yourself back in a better financial situation while still maximizing your retirement contributions.
Pay Off Balances Strategically
With a tight budget and less-than-stellar credit, you have to prioritize your bills. Paying the minimum amounts for low-interest debt makes sense if your money is stretched. Focus your finances on paying off the high-interest debt first to help reduce your credit crunch. If you have high-interest credit cards with big balances, work on paying these off to avoid the hefty charges each month. Additionally, as you reduce the amount you owe, your credit score may get a boost with better credit utilization.
Work on Repairing Your Credit
While you’re saving and scrimping, focus extra effort on credit repair services. Getting your credit reports can help you understand why you have bad credit. Then you’ll know what to work on and what you need to fix. If you have errors on your credit report that are lowering your score, contact the credit reporting agencies to get the mistakes removed or sign up for credit repair services. If you can get these negative items removed, you’ll see your credit score improve and your financial opportunities for loans and mortgages increase.
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