Should I Pay off Debt or Build Up Savings?

It’s a difficult one isn’t it? Save or pay off debt? Save money so you can sleep easy at night, or pay off debt so you can sleep easy at night.

I’ll say straight out that there isn’t one correct answer.

The answer is, it depends.

It depends on your financial situation and it depends on how you feel about it. As in, how do you really feel about your debt and lack of savings?

Because your feelings are super important to what you do about that question – save or pay off debt now?

As you know when working to make your financial situation better, the two most important factors are paying down debts and increasing your savings.

Taking care of one of these issues will improve your financial outlook quite a bit. Taking care of both puts you in a much stronger and better financial position for your future life.

However, a problem many people encounter is whether to pay down debt before building up their savings or vice versa.

Which to tackle first will depend upon your individual circumstances.

Which one is most beneficial to you right now?

And yes I know both are beneficial!

Let’s take a deeper look at some things to keep in mind when considering whether you should save or pay off debt first.

person looking at receipts and financial documents to signify save or pay off debt

Assess Your Situation

First, you need to take a moment to assess your situation.

Take a look at the type of debt you have.

Your high-interest consumer debts such as credit cards are important to tackle early.

These are what I call bad debt.

Because they cost a lot of money and are usually a result of you having lived above your means. I.e. spending more than you earn.

Getting rid of your high interest debt will give you more money to put toward other financial goals, including your savings.

Along with tackling consumer (bad) debt, you also need to ensure you have an emergency fund.

Everyone needs an emergency fund, even if they have debt.

Because life happens.

And when it does you need an emergency fund to pay for life’s emergencies.

Having money set aside will help you to avoid adding more high-interest debt or finding yourself in a position you’re not prepared for when a crisis occurs.

If you already have an emergency fund you might be wondering whether to empty your savings to pay off your credit cards.

It’s very simple.

Please don’t.

Your emergency fund is for true emergencies, not to be used as a get out of debt quick scheme.

If you have savings over and above your emergency fund then you could consider using some of them to pay down your debt.

You need to make your decision based on what debt you have, what savings you have, what they are for and the interest you are receiving and paying on them all.

Emergency Fund Or Pay Off Debt?

What if you have debt that you want to pay down but no emergency fund?

Do you put money into your emergency fund or pay off debt?

My personal advice is that you should definitely prioritize saving if you have no emergency fund. Remember, life happens. Emergencies happen, whether you are ready for them or not.

Experts recommend you have at least the equivalent of three to six months’ worth of your basic expenses in your emergency savings account.

This is not the same as 3-6 months worth of what you currently spend.

Basic expenses are just that. Absolutely basic. What you need to survive. Think basic grocery spending, no clothes, no eating out, no expensive entertainment.

Having at least 3 months of basic expenses will tide you over in the event of a job loss or other financial disaster.

Therefore, please do set money aside in your budget to start accumulating this total.

Once your emergency fund is in place, you can focus on paying down that debt.

Related posts:

How To Survive, Thrive And Save Money On A Tight Budget

How To Kickstart Your Rainy Day Fund When You Are Broke

open wallet with credit cards, dollar bills and coins spilling out to signify save or pay off debt

When to Pay Down Debt First

If you have an emergency fund with at least 3 months’ worth of basic expenses, you can then put all your focus into paying down your high-interest consumer debt.

Removing your interest payments over time will give you a much higher return than on most other traditional investments.

Your credit cards could easily be racking up interest at 20%.

Whereas investing in the stock market might return 5% over time and a savings account might give you 1% if you are lucky right now.

Paying off your credit cards and other high interest debts frees up all that extra money each month.

For example, if you are devoting $500 a month to debt repayments then once your debts are gone you have $500 spare every month.

You then have that $500 to invest elsewhere, such as putting it toward paying your future self, your retirement, long term safety net savings, kids college/graduation/weddings.

Make sure a significant portion of your monthly budget is set aside to tackle your high-interest credit cards and loans.

Consolidating credit cards bills into one balance-transfer card could help.

Paying off your debt early can also help improve your credit utilization, thus leading to a higher credit score.

Ultimately, whether it’s best to pay off debt or save money first depends upon your unique situation.

Follow these guidelines to get started.

Then, you can likely craft a balanced approach that allows you to continue saving for the important things, while keeping your debt to a minimum.

Related posts:

21 Things You Can Do To Become Debt Free

How To Choose The Best Method To Become Debt Free

What To Do When You Can’t Afford The Snowball Method

womans' hands holding a an pink purse and pulling out dollar bills

How to save and pay off debt

You may find yourself in the situation where you have both debts to pay off and an emergency fund to fill up. Debts still have minimum repayments you must meet.

So in reality, you end up needing to know how to pay off debt and save money at the same time.

It’s all about how you budget your money and allocating enough money to do both.

Your emergency fund is about saving for basic expenses and it might mean that initially you need to cut your budget and expenses down almost to that level.

Cutting your spending drastically (or not so) will help you free up some much need money to do the double – pay off and save.

Work out how much you need to put aside for your debt repayments.

Then work out your basic expenses. This post on how to drastically cut expenses will help you do this.

Set yourself a goal to fill your emergency fund with 3 months of basic living expenses and a timescale for how long you want that to take.

Ideally within 6-12 months if you can (because you just know life is going to happen sooner than you want it to).

This period of both saving and paying off debt might feel difficult bit it won’t last long and you’ll thank yourself later for persevering.

Use the Money Saving Mini Bundle to help you track your emergency fund progress:

how to pay off debt fast

So you’ve got the bit between your teeth and you are super determined to get rid of your debt, like right now.

You can pay off debt fast if you are determined but you need to do things differently. Not only do you need to stop spending money you don’t have, you need to learn to live way below your means.

And the reality is this means you need to live your life differently. That’s not a negative, it’s just the reality.

In fact you can turn this into a positive. This is your chance to change your financial situation both now and in the future.

You can learn to love living within your means and save money. I bet you can find all sorts of ways to not only save money but also to stop wasting money.

These posts will help you:

How To Start Saving Money: 7 Tricks You Can Easily Do

35 Ways You Are Wasting Money [And How To Stop Right Now]

45 Creative Ways To Save Money (You Need To Know)

white traditional kitchen with wooden worktops and sunflowers in a white vase

pay off debt or save for a house deposit?

It can very tempting to put money aside for a house deposit even when you have debt. And I get it, you want to have your own place, to start building your future.

How are you going to afford the costs associated with owning a house if you have debt repayments to make?

My answer to you about whether to pay off debt or save for a house deposit is simple. Pay off your debt first.

Your debt is costing you money in terms of the interest. Remember credit cards are often as high as 20% or more. Each debt repayment you make is made up of debt and a chunk of interest.

Once it’s paid off then everything you save can be thrown into building your house deposit.

It depends

Should you save or pay off debt? The answer is still, it depends.

It depends on your circumstances and what you want to do.

For me, I would be paying off debt as fast as possible, once I had an emergency fund in place. The reality is that when I had debt, I had no emergency fund because I didn’t know I should have one.

Which meant when life happened and an emergency hit, I had no fund to fall back on.

So where did I turn to? You got it, my credit cards.

That is why you need to save first. You don’t want your emergency situation to make your debt worse.

Grab your copy of the Money Saving Mini Bundle to kickstart your savings today

Come and follow me on Pinterest for more money saving hints and frugal tips!

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Last Updated on 3rd March 2021 by Emma

About Emma

I'm here to help you become confident in making the best money decisions for you and your family. Frugal living has changed my life, let me help you change yours.

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