Is It Better to Save or Pay Off Debt?

If you have high interest debt, paying it down will usually save you more money than putting extra cash into savings because the interest charged on debt can outweigh what you earn in a savings account.

But using every dollar of savings to pay debt can leave you vulnerable to the next unexpected expense, so keeping a small emergency cushion while tackling debt is often a more practical approach.

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When Should You Pay Off Debt First?

Paying down debt should generally be the priority when the debt has a high interest rate, such as a credit card balance.

The reason is simple: if your debt costs you more in interest than your savings earns, you're losing more to the debt than you're gaining from saving.

If you have several debts, putting extra money toward the highest-interest debt first can reduce the total amount of interest you pay and help you become debt-free sooner.

Just make sure you continue making at least the required minimum payments on all of your other debts.

When Should You Save First?

Saving may need to come first if you have little or no emergency savings.

Without money set aside, an unexpected car repair, dental bill or loss of income could force you to use your credit card or borrow again.

You don't necessarily need to fully fund three to six months of expenses before paying down debt. You could start by building a smaller emergency cushion that gives you some breathing room, then direct more of your available money toward your debt. Over time, an emergency fund can be built toward roughly three to six months of regular expenses.

Can You Save and Pay Off Debt at the Same Time?

Yes, and for many people this is the most realistic approach.

For example, you could:

• Keep making your required debt payments

• Put a smaller amount into emergency savings each payday

• Direct most of your extra money toward your highest-interest debt

Once that debt is paid off, you can redirect the money you were using for payments into your savings.

This approach allows you to make progress on your debt without leaving yourself completely unprepared for unexpected expenses.

What If Your Debt Has a Low Interest Rate?

The decision becomes less clear when your debt has a relatively low interest rate.

If the interest rate on your debt is low and you already make your payments comfortably, it may make sense to continue saving while paying the debt down gradually.

Compare:

• The interest rate you're paying on the debt

• The interest you're earning on your savings

• How much emergency savings you already have

• How quickly you want to become debt-free

The higher the cost of your debt, the stronger the case becomes for paying it down sooner.

So, Should You Save or Pay Off Debt?

If you're choosing between the two, a useful order is:

1. Make the minimum payments on all your debts.

2. Build a small emergency cushion if you don't have one.

3. Focus extra money on high-interest debt.

4. Build your emergency savings further once expensive debt is under control.

You don't have to choose between having savings and becoming debt free. The goal is to keep enough cash available for unexpected expenses while preventing high interest debt from costing you more than necessary.