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Kevin O'Leary: Here's the age when you should have your debt paid off

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Kevin O'Leary: Here's the age by which you should have your debt paid off
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Kevin O'Leary: Here's the age by which you should have your debt paid off

For many people just beginning their careers, retirement seems too far away to start planning.

But in order to retire in your 60s, you need to get started down the right financial path early by saving and minimizing unnecessary debt, according to Kevin O'Leary, an investor on ABC's "Shark Tank" and personal finance author.

"People today don't spend enough time thinking about the future and what they've got to save for when they get old," O'Leary tells CNBC Make It. "It's not easier when you're older to make money — it's easy to make money when you're younger.

"You've got to save it while you're making it — that's the whole idea of financial freedom," says O'Leary.

That's because your spending, responsibilities and likelihood to take on debt only increase as you get older.

"Think about life," O'Leary explains. "You go to college — student debt. Then, you find someone, you get married, you buy a house, more debt — that's called a mortgage. You have kids, more debt — getting them through school."

Kevin O'Leary
Courtesy of Kevin O'Leary

So start planning as early as possible for how to pay off that debt throughout your life, O'Leary suggests. That way, you can be financially secure by the time you retire.

When should you aim to have it all paid off? Age 45, O'Leary says.

"The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s," O'Leary says. "So, when you're 45 years old, the game is more than half over, and you better be out of debt, because you're going to use the rest of the innings in that game to accrue capital."

To plan for retirement and pay down debt, O'Leary and other experts offer these tips.

Courtesy of Kevin O'Leary

1. Save and invest for the long term

"Always ask yourself if you're buying something: Do I really need this? Is this something I have to have? Most of the time the answer is no. So don't buy it," O'Leary suggests. "Instead, invest the money so you can get to that equilibrium a lot sooner."

Watching your spending can help you avoid credit card debt, which charges notoriously high interest. And, by using that saved money to invest early, you can take advantage of the magic of compounding, and see your money grow while you sleep.

2. Think carefully about a mortgage

Not all debt is the same. A mortgage, for example, can be leveraged into an appreciating asset, like a house.

"Mortgages are more of a grey area than credit card debt, because real estate can be an investment," O'Leary says.

Still, paying off mortgage debt can have benefits. Self-made millionaire and wealth management expert David Bach says paying off your mortgage early can be a key for successful retirement.

"I can tell you, having been a financial advisor at Morgan Stanley, my clients who retired at 50 years old, the secret was: They had paid their mortgage off early," Bach tells CNBC Make It. With a 30-year mortgage, make a plan to pay it off in 20, or preferably 15 years, he says. To do that, contribute an extra 20 percent to your monthly mortgage payment, even if it means sacrificing elsewhere in your budget.

Unlike Bach, who says "buying a home is the escalator to wealth in America," O'Leary suggests seriously considering whether or not you should purchase a home in the first place.

"In my opinion, most people in their 20s, or even 30s, have no reason to be taking on that kind of debt," O'Leary says. "Homes don't always gain as much value as you expect — at least not anymore and at least not quickly."

If you do decide to take out a mortgage to own your home, O'Leary agrees that you should pay it off as quickly as possible.

"There's never an incentive to stay in debt. Life is unpredictable," he says. "What happens if you're laid off or incur unexpected expenses elsewhere? Your once-manageable mortgage is suddenly going to seem not so manageable."

3. Make a monthly strategy to pay off debt

If you already are in debt, commit to a method for paying it off.

Some experts recommend a strategy called the snowball method, which was popularized by "The Total Money Makeover" author Dave Ramsey.

First, write out all of your debts from smallest to largest. Focus on the smallest debt, and funnel as much cash as you can toward that debt to pay it off (while paying the minimum balance on the others.) Then, once the smallest debt is repaid, move on to the second-smallest debt. This strategy's benefit is the motivation of seeing debts disappear one at a time.

Other experts recommend the avalanche method: Start by listing out the interest rates on your debt and focus on paying off the debt with the highest interest rate. This strategy can help you save by minimizing how much you spend in interest payments over time.

4. Don't neglect your 401(k)

If you have a 401(k) retirement plan through your employer, be sure to ask if that employer has any matching offers. If they do, that means the company is willing to match contributions you make to the account up to a certain amount.

"The company match is literally free money," personal finance author Ramit Sethi writes in, "I Will Teach You To Be Rich."

But one in five people don't contribute enough to get the match, according to data from benefits administrator Alight Solutions. Certified financial planner Eric Roberge says missing out on that opportunity is the biggest mistake Americans are making in saving for retirement.

—Video by Zack Guzman

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