Save Money vs. Pay Down Debt: Which One Should You Choose?

Save or pay down debt? It’s a tough call and one that many Americans seem to struggle with.

According to a 2019 Bankrate survey, three in 10 Americans have more credit card debt than emergency savings. In a previous survey, just 40 percent of those polled said they could cover a $1,000 emergency in cash.

If you want to build up a cushion in your bank account — but you’ve also got debt — here’s how to decide which to tackle first.

Figure Out Why You’re Stuck

A good place to start when trying to settle the ‘save or pay down debt’ debate is to answer this question: What’s keeping you from pulling the trigger on either one?

“People may struggle with the decision to save or pay down debt for a few reasons,” says Sean Fox, co-president of Freedom Debt Relief.

So, consider whether any of the following applies to you:

  • You don’t feel like you have enough disposable income to go after either goal the way you want.
  • You’re not sure whether saving or paying down debt is more important for your financial health.
  • You feel pressure to do both but instead of taking action, you freeze.

Bobbi Olson, host of the CentsAble Chat personal finance podcast, says that last one is pretty common.

“In my experience, once a person decides to take an active role in managing their money, they often go from not paying any attention to being almost obsessed,” Olson says.

“They spent so long doing nothing, now all they can think about is making sure they do the “right” thing, and sometimes it can paralyze them for a while.”

Weigh the Benefits Against What Matters More

Is saving or paying off debt better when it comes to your money goals? It’s the ‘chicken or the egg’ debate in financial form, says personal finance consultant and educator Kassandra Dasent.

“Saving and eliminating high interest debt both provide important financial benefits. Both goals are essential in creating and maintaining financial stability,” Dasent says.

Your monthly debt repayment “not only affects how much of your paycheck you get to keep,” Dasent says, “but your credit score and ability to take on an important loan, such as a mortgage, may be impacted by the amount of debt you’re carrying.”

On the savings side of the coin, Dasent says having money in the bank is a measure of protection against unexpected situations. If you lose your job, your car breaks down or your cat gets sick, your savings can keep you from having to add to your debt to cover those expenses.

The real question to ask yourself is not whether saving or paying down debt is better, but which one matches up with your financial priorities. Olson is firmly in favor of paying down debt first, especially if you’re stuck with a high interest rate on loans or credit cards.

“The interest is costing you money each day and the faster you get rid of it, the less you pay,” she says.

As of February 2019, the average credit card APR was 17.55 percent, according to a CreditCards.com report. For example, say you have $5,000 in credit card debt at 17.55 percent. Your monthly minimum payment is $124. If you pay just that amount, it would take you five years and two months to pay it off, costing you $2,693 in interest.

If you were to bump your payments up to $500 a month, you could wipe out the debt in 11 months and pay just $458 in interest instead. That’s a huge savings but what if you have no cash tucked away at all?

“Without question, if someone has nothing saved then that should be an immediate priority,” Dasent says.

If you don’t have enough in savings to cover at least one month of expenses, she recommends addressing that as quickly as possible. From there, you can decide whether to keep your immediate focus on growing your savings or attacking your debt.

Is It Possible to Do Both?

It is possible to pay down debt and save money – if you have a clear plan and you’re fully committed.

“It doesn’t have to be an either or choice, but it’s imperative to assess your financial situation and how you feel in order to rank your goals,” Dasent says.

The first step is to create a budget, Olson says. This way you know how much money you have to work with once your living expenses and bills are paid. From there, you can decide how to divvy it up between savings and debt repayment.

“You could split the money right down the middle, half for savings and half for debt,” she says, or choose a different percentage, like 80/20 or 60/40.

Next, prioritize your savings and debt repayment goals. For example, your savings goals might include:

  • Building your emergency fund
  • Saving a down payment to buy a home
  • Putting money away for retirement
  • Saving money for college if you have kids

It would be nice to do all of them at once but that’s probably not realistic if you’re also trying to get rid of your debt. So, consider starting with an emergency fund.

“Start small and work toward a fund that covers six to nine months of expenses gradually as you pay off debt,” says Fox.

Once that savings goal is crossed off the list, move to the next most important one. And, apply this same strategy to your debt payoff.

Fox says that after your necessities — meaning food, shelter and clothing — are covered, you should then pay the minimums on your mortgage or car loan first. Then, he says to make the required monthly payments on your student loans while putting extra money towards credit cards or other high-interest debts.

With those debts, Fox recommends the snowball method. In this approach, you list your debts according to the order you want to pay them off. Then you pay as much as you can towards the first debt, while paying the minimums on all the others. Once the first debt is paid off, you roll that payment over to the next debt, repeating the process until the debts are gone.

Ready to Save and Pay Down Debt?

These tips can give you a solid starting point for a dual savings-debt payoff strategy. And here’s one final pro tip: Start auto-saving with a Chime account.

With a Chime account, you can automatically deposit money into a savings account. You just set your savings goal, schedule a recurring transfer and your account does the rest. That’s all it takes. It’s a simple, hassle-free way to add to your savings and best of all, it won’t keep you from making a dent in your debt.

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