Deciding whether to save or pay off debt isn’t an easy choice — in fact, it’s highly contested.
On one side, financial experts argue that you can and should do both at the same time. “Delaying your start date for years because you’re focused on debt can have serious long-term repercussions. The rest of your life isn’t ‘all or nothing,’ and your money doesn’t have to be either,” Erin Lowry, author of the “Broke Millennial” book series, recently wrote.
On the other side, pausing investments to focus on debt worked out for Bernadette Joy, a financial coach and founder of Crush Your Money Goals, who paid off $300,000 in debt using this strategy and others.
Combined, saving money and paying off debt will get you to financial freedom — or at least financial stability. But inevitably, one will have to be prioritized over the other.
To get a sense of how individual financial needs can be prioritized, we put five hypothetical money scenarios into the quiz below. See how many you can get right.
In almost every situation, we recommend paying at least the minimum required payment to your lenders. And it’s important to remember that there isn’t one correct approach to money management. If you would like personalized guidance on how to pay down your debt, we recommend making an appointment with a nonprofit credit counseling organization.
When to Save Instead of Paying Down Debt
How much to save
Three to six months’ worth of expenses is typically the recommended amount for an emergency fund, but any amount is helpful. Our experts recommend a $1,000 emergency fund as an achievable goal for people who have little savings and want a hedge against unexpected car repairs, pet sickness, and other emergencies. From there, you can build to a higher amount.
Where to keep your money
For money you need for paying bills, use a checking account. These accounts are intended for transactions and have no limit on withdrawals. Savings accounts and money market accounts are beneficial for short- and long-term savings goals, such as emergency funds, vacation savings, and home down payments, but make sure not to initiate more than six withdrawals or transfers per month, since it’s not allowed by federal law. If you want a higher interest rate and don’t need money right away, you can invest in a certificate of deposit (CD) that offers attractive rates of return in exchange for locking away the funds for a certain number of months or years.
When to Pay Off Debt Instead of Saving Money
If you already have an emergency fund, then you can put more funds toward debt repayment. Those who funnel all their extra dollars toward debt — and none toward savings — could find themselves in a debt cycle. For example, if you need to foot $200 for a plumber and don’t have that money saved up, the bill may have to go onto a credit card that you were already trying to pay off.
How to Save Money and Pay Off Debt
Saving money and paying off debt requires a delicate balance. If you don’t have an emergency fund, we recommend saving for one while paying the minimum on your debt payments. Then, once you have money saved for a rainy day, you can devote more resources to getting rid of high-interest debt. Experts typically like the “snowball” and “avalanche” debt repayment strategies. With the snowball method, you pay off the card with the smallest balance first (to give yourself a quick first win), then proceed to the card with the next-largest balance. With the avalanche method, you pay off the card with the highest interest rate first (to reduce the money you spend in interest long term), then proceed to the card with the next-highest rate.
The avalanche method saves you money in the long run, but the snowball method is often recommended for people because the feeling of paying off a credit card or loan quickly can motivate you to continue your debt payoff plan. What matters is finding a plan that works for you and your needs and goals.