Should I Pay Off Debt Or Save?

Should I pay off debt or save money first?
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Have you ever asked yourself, “Should I pay off debt or save money first?” or “Can I do both at the same time?” You are not alone.

Depending on different financial situations, it could make more sense for some people to pay off debt before saving, or vice versa.

So should you save money or pay off debt?

I wish I could tell you a definite answer, but there is no one-size-fits-all solution. It all depends on your circumstances and what you want to achieve.

In this post, we will look at different scenarios for each option so that you can make confident financial choices for yourself (pay off debt or build up your savings first, or possibly do both simultaneously).

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Should you save money or pay off debt?

Why You Should Pay Off Debt First

Should you pay off your debt before saving? Here are some scenarios for you to consider.

1. You Already Have A Financial Safety Net Before Starting Your Debt Payoff Journey.

When you have built up your emergency fund, you can focus on eliminating debt as fast as possible.

2. You Have Lots Of High-Interest Debt.

According to, the average credit card interest rate is 16.13%, and it’s expected to go up.

Paying off debt should be your number one priority if you have high-cost debt. By doing this, you can save big bucks on interest in the long term and get out of debt faster.

Meaning: The longer you postpone paying off these bad debts, the more interest you end up paying and the more money you are wasting.

On top of that, it seems to take forever to wipe out all your debt psychologically and financially.

If you want to get out of these toxic debts even faster, consider pausing your 401 (k) investment plan for a little while and pouring all the money to pay down debt. Notice that it’s a temporary pause.

3. The Interest On Your Debt Is Far Higher Than You Can Earn In A Savings Account Or The Stock Market.

It makes perfect sense to pay off debt before saving if the interest is super high and you are paying for it apart from your debt.

💡 Note: Interest rate varies from person to person. Many factors affect the rate, such as your credit score, the lender, and the loan type.

Not sure how much you are paying for the internet alone? Check the agreement or consult your lender. 

4. Debt Is Holding You Back From Achieving Financial Goals That Require Substantial Savings.

When you are debt-free, you will have extra money each month to work toward your money goals (e.g., dream wedding or international travel) and achieve financial freedom.

Imagine if you pay $700 to your monthly debt repayments, then you will have an additional $700 every single month after wiping out debt.

Sounds pretty good, right?

If you are unsure when you will eliminate all your debt and how significant contributions you need to make to speed up the process, a debt payoff calculator could help.

5. You Want To Improve Your Credit Score.

A low credit score could negatively affect your eligibility for purchase loans, such as a mortgage loan.

Even if you have met the minimum credit score requirement, you might get strict loan terms and higher interest rates as a riskier borrower.

Paying off debt as quickly as possible before saving could help increase your credit score.

6. Debt Burden Harms Your Health (Mentally, Physically, Emotionally, And Financially).

It’s hard to have peace of mind when buried in mounting debt.

Pay off debt or save money; which one is better?

If you have these countless sleepless nights because of debt worries and constant financial fights with your partner, then making debt reduction your priority makes sense.

Why You Should Save First Before Paying Off Debt

Should I save money or pay off debt?

There are many reasons people choose to save money before paying off debt. Here are some good ones. 

1. You Don’t Have An Emergency Fund. 

Nearly 25% of Americans have no emergency savings, leading to more debt when a crisis hits.

Building up cash reserves for the unexpected would help you stop taking more debt and gain personal financial security.

In this case, saving before paying off debt might be a better option.

We will talk more about the importance of an emergency fund later. Yes, it’s that important to deserve a dedicated section.

2. The Debt Interest Is Low (2% Or Lower).

When you are struggling financially, paying off the low-interest loan won’t seem as urgent as saving for an emergency fund, paying the monthly bills, and breaking the paycheck to paycheck cycle.

3. Your Company Offers A 401(K) Match Retirement Plan.

Should I pay off debt or save for retirement?

This doesn’t have to be a difficult choice if free and easy money is available (i.e., your employer-sponsored retirement plan).

Plus, you can save money on taxes thanks to the tax-advantaged fund, and you might even earn dividends over time.

However, if you are self-employed, you can open up an IRA (Individual Retirement Account) and contribute 5% to 10% of your income for your retirement planning.

4. The Earlier You Start Stashing Cash Into Your Savings Account, The Sooner You Can Take Advantage Of Compound Interest.

Meaning: You can build wealth more quickly.

💡 Note that if you prioritize saving over paying down your debt, you still need to pay the monthly minimum balance on your debt on time. If you fail to do that, you will pay late fees, affecting your overall credit score.

If possible, pay more than the minimum as the (high) interest rate can eat up your savings in the long run.

Related: Best Ways To Save Money Monthly While Paying Off Debt

The Importance Of An Emergency Fund

We all know life happens, but we don’t know when and how. A financial disaster usually pops up when you least expect it. So it’s essential to have a buffer in place as fast as possible, even when you are in debt. 

In other words, it’s better to prioritize saving for a rainy fund before paying down your debt.

The last thing you want is to fund an emergency expense using a credit card without being able to pay back the total balance on time during your debt reduction journey. 

Depending on the debt load and the interest (16% or more), it might take decades to get to a zero balance, which puts you in a worse financial situation than you first started. 

However, you won’t go into future debt (high-interest debt) with a solid savings cushion.

Consider building an emergency fund when thinking about “Should I pay down debt or save?”

Related: Why You Need To Stash For Emergency Savings ASAP

How Much To Save Before Paying Off Debt

The amount doesn’t have to be three to six months’ worth of living expenses. Again, it all depends. Even saving as little as $500 or $1,000 as a stater would make a huge difference. And you don’t have to be a super saver to get your first $1,000.

Keep reading: How To Make $1,000 Using Your Smartphone

The small nest egg might not fully cover significant emergency expenses, but you can have some breathing room.

You can grow your reserves more aggressively after paying off debt. And don’t forget to stash it in a high-yield savings account to earn more interest. 

How To Pay Off Debt And Save Money At The Same Time

Achieving debt-free living is important, but so is saving for your future.

If you can do both at the same time, then whether to pay off debt or save money won’t be a question anymore.

Although balancing both savings and debt payoff could be challenging, it’s doable.

Paying off your debt fast while saving at the same time is all about how to budget your money effectively, break bad money habits, develop a debt repayments plan, and track your debt payoff progress.

Also read:

Here are a few tips to retire your debt fast while saving.

1. Live Below Your Means.

It could mean a lifestyle change for many people. But don’t worry. It’s not a bad thing at all.


First, you can free up some cash to pay down debt and beef up your savings by trimming expenses.

Besides, you can form good money habits (a lifetime benefit) by reducing bills from your budget and stopping wasting your hard-earned money on things you don’t need.


2. Increase Your Income.

Apart from the money you currently use to pay down debt, it’s wise to boost your income to have more spare cash for your debt reduction plan.

Also read:

3. Review Your Debt Repayment Plan And Reduce The Costly Debt.

Loans are not set in stone. When debt is piling up, and there is little money you can use to pay toward the balance owed, you can find ways to make it less expensive.

It could be refinancing your student loan at a lower rate and lowering the monthly payment. Perhaps you want to negotiate with your credit card company for a better term. Or, consider a 0% balance transfer if you have high-interest credit card debt.

I bet you will be surprised how much $$$ you could save on interest charges and how quickly you can get rid of debt by adjusting your plan.

4. Grow Your Savings.

While paying off debt, you want to allocate a certain amount to an emergency fund before other money goals.

Also read:

Is It Better To Pay Off Debt Or Save For A Down Payment?

It’s tempting to save a down payment for a house, especially when the interest is low. 

However, unlike setting money aside for an emergency fund, you can wait a bit for a house deposit. 

If you have high-interest debt, focus on paying off your debt first, as you don’t want to waste the money you could have saved. 

On top of that, bad debts could affect your borrower’s credit score, leading to a complex mortgage application process. 

Once you’ve paid off your debt, you can contribute to your down payment. 

The Bottom Line – Should I Save Money Or Pay Off Debt First?

Regardless of paying off debt or saving money, they are both critical for your financial wellbeing.

You are one step closer to financial freedom whenever you assign every dollar to work. So, don’t beat yourself up when you decide to focus on one than the other.

Alternatively, striking a balance between saving money and closing your debt is also a viable option.

Whether you choose to pay off debt or save or do both simultaneously, as long as it helps you get rid of debt and save, it’s the best option for YOU.

Enjoyed this post? Don’t forget to share it and follow Create Earn Live on Pinterest for more tips on saving money and ditching debt.

Should I save or pay off debt?

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