Sense & Centsibility Blog

Should you save or pay debt first?

It's easier to keep up on other bills when credit card debt is paid off. Not to mention you're losing money by having to pay interest charges. So your gut instinct might be to focus on paying off debt first before saving for emergencies or for your retirement. However, it's not always a simple decision depending on your financial situation.

When to pay down debt first

If you're paying a lot in interest

Unless you have a temporary/promotional rate of 0%, you're likely paying quite a bit in interest. If that's the case, getting rid of debt faster will save you money by not spending your hard earned money on interest charges.

If your budget is tightDebt VS savings

Many Americans are living paycheck to paycheck and for some it may be due to having credit card or other debt payments. Paying off one of those debts is a great way to give yourself some wiggle room in your budget.

If you want to save money in the long run

If your debt consists of student loans, a car loan, or a mortgage, making extra payments will help you save money in the long run. Not to mention, making extra payments will help you pay off those bigger loans more quickly. And if you're nearing retirement it will give you some peace of mind knowing you'll have less debt obligations.

If your debt load is making life difficult

Trying to afford credit card payments is tough for a lot of people. If it gets to the point where you fall behind, it will be negatively affecting your credit. You'll start receiving collection letters and calls and if you're unable to catch up, non-payment of collection debt can lead to judgments and wage garnishment.

When to save first

If you have no emergency fund

Without savings, an unexpected expense can lead to accruing new debt or adding to existing debt. So if you have no money in emergency savings, it's a good idea to make savings a focus first.

If you're nearing retirement age

Putting off saving for retirement until you are debt-free may not be smart because time is your most valuable asset. With compounding interest, even small contributions to your retirement plan helps it grow. Bonus tip: if it's offered, be sure to take full advantage of employer match for your retirement account.

If you only have certain types of debt

If you have secured debt such as a mortgage or car loan &/or student loans with low interest rates, then saving first may make more sense - especially if you have nothing in savings for emergencies or retirement.

Do Both If You Can

With all of that said, my best suggestion is to try to do both if you can. Both paying off debt and setting aside money in savings will help you gain financial stability now and in the future.

  • The benefits of paying off debt include creating more wiggle room in your budget, giving you the ability to save more and ensure that you have enough money for all of your expenses. Plus, when debt is gone, the interest charges will be gone - along with stress that comes from debt.
  • The benefits of savings are just as important. There has been article after article over the last few years about too many Americans not having money in savings for an emergency. So building up an emergency fund provides peace of mind should an unexpected expense pop up. You won't have to accrue debt if you have a safety net to fall back on.

Having 3-6 months' worth of expenses in emergency savings is the best way to prevent a financial crisis. However, if you're trying to pay off debt at the same time, aim for $500-1,000 in your emergency fund so you at least have a small safety net in place. Then when you've taken care of debt, make savings your main focus. And don't forget about retirement savings, too!

A great way to pay down debt faster and save money is a Debt Management Plan. To see if it's right for you, call LSS at 888.577.2227 for your free financial counseling session or get started oneline.

Author Elaina Johannessen is a Program Director with LSS Financial Counseling.