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Is It Better To Save Money Or Pay Off Debt?
The choice between saving and paying off debt isn’t simple, and it doesn’t have to be absolute. It’s about weighing the numbers, assessing your risk tolerance, and your priorities. Strive to strike a balance that keeps you moving forward—addressing today’s challenges while safeguarding tomorrow’s opportunities.
“Deciding whether to save money or pay off debt feels like standing at a financial crossroads, where every turn comes with its risks and rewards. The answer depends on the type of debt you’re carrying, the interest rates attached to it, and how secure you feel about your financial future. It’s a balancing act—juggling immediate obligations with the need to prepare for what’s around the corner,” says Andrew Gosselin, a certified public accountant.
Like all financial decisions, think things through and try to simplify the debate. Elizabeth Ralph, a wealth strategist and founder of The Spiritual Investor podcast, says that instead of framing it as an either/or question, ask yourself how you can do both or which feels better to you—lower debt or more cash.
“Both are their own forms of abundance and when you can see them that way, it becomes an 'AND' situation versus an 'OR'. How do you use one to get the next instead of looking at them individually?” she says.
The experts weigh in to help you develop a strategy that works best for you.
What you need to know
The reality is, you will most likely need to save and pay off debt at the same time, rejiggering percentages based on circumstances. Going extreme on one and pushing the other too far aside isn’t the best option.
“When I was 21, I had $30,000 in debt. I put every spare dollar toward paying it off, thinking I was doing the right thing. But then my car broke down, and with no savings, I had to go deeper into debt to cover the repair. I realized that just paying off debt wasn’t enough,” says Fradel Barber, founder and CEO of The World Changers, a provider of financial services and education.
She started saving while paying down her balances. The progress on her debt slowed down at first, but when the next emergency hit, she didn’t have to borrow again. “I was able to pay off my debt in a year while building a safety net,” she says.
Deal with debt
Debt can’t be totally ignored, of course. So be strategic. Thomas Maluck, a National Financial Educators Council certified financial education instructor, offers some guidance. He says to at least make minimum payments on your debt.
“Don’t take on penalties or hits to your credit score by avoiding debt to build savings. The silver lining to making regular payments on your debt is that the history of on-time payments strengthens your credit profile,” says Malick.
Once that minimum is paid, put some money toward your emergency fund. “It may hurt not to maximize your debt payments immediately, but life can go sideways at a moment’s notice. We’re talking about crises that would make a loan or credit card look like child’s play. Saving up at least three months’ worth of expenses is a good buffer,” he says.
Next, put together your debt list. Which debt has the largest interest rate? If you owe credit card debt, it likely has a double-digit interest rate. Hit it as hard as you can so it doesn’t become a dizzying amount.
When to prioritize saving
There are times when saving should take priority. “If you don’t have an emergency fund with at least 3-6 months’ worth of expenses, building that safety net should come first,” says Terry Wright, a portfolio manager and chartered investment manager with LT Wealth Management Partners.
Matluck says to compare your single-digit interest rate debts and available high-yield savings accounts. Depending on the interest rates, your savings may be able to grow faster than your debt, in which case it could be wise to take advantage of high savings rates.
For example, if you have a debt with a 4% APR but have access to a savings account that gains by 5%, you could come out ahead by prioritizing the savings account while making minimum payments.
“For some folks, though, paid off debt is the ultimate money saver and source of security. The psychological benefits of owing zero debt are uniquely valuable from person to person,” says Matluck.
Tom Mathews, a certified financial educator and author of How Money Works, offers insight, “If your debt carries a low, fixed interest rate (e.g., federal student loans or a mortgage), prioritizing saving, investing, or contributing to retirement accounts may offer greater long-term benefits.”
Also, he says, if you foresee significant costs on the horizon, such as home repairs, building your savings is a smarter move than paying off low-interest debt.
The takeaway
Debbie Hancock, a financial management consultant and money mindset coach, points out that when deciding between saving and paying off debt, one thing to ask yourself is what helps you sleep better at night.
She says, “while high-interest debt typically needs immediate attention, don't sacrifice building a basic financial safety net.”
