Save Money or Payoff Debt: Which is which?


Some experts say paying off your debt first is better while others adhere to the conventional wisdom to save more money before you pay off your debt. If you’re like most people, getting two contradicting advice can be quite confusing. Considering that personal decisions when involving your finances are often complicated, things can get even more confusing from here. But like with every other major decisions you make in life, there is no one absolute rule to follow in the case. At the end of the day, it’s about your personal circumstance and which option is best for your situation.


To answer the question whether to save money first or pay off debt first, here are key considerations that should help you decide:

Amount of debt owed

One of the first things you need to do is find out the amount of debt you owe. This includes mortgage, car loans, credit cards and other types of debt you currently owe. By knowing the total amount of debt you’re currently sitting in, you’ll have a clear idea of where you’re at financially. Make a list of your debts and their designated amount then arrange them according to interest rates. The one with the highest rates should be prioritized once you’re ready to start paying off your debt.

Interest rates for your debt

Don’t stop with just knowing the amount of debt you owe. Go deeper by actually finding out how much interest your debts are costing you. Arrange your debt according to these interest rates. Chances are high that your credit cards will top the list. Credit cards when maxed out and not paid in full can cost you a fortune in interest. This means that you’ll have to pay them off first chance you get.

Amount of savings you have

If you’re like most millenials then you probably have zero or negative savings. But hopefully you’re not a millennial or a typical consumer. Either way, you need to know where you’re at financially in terms of the amount of savings you have. Ideally, you should have some emergency funds to depend on for unexpected financial emergencies. As a rule of thumb, you should save up to 3 to 6 months’ worth of expenses to constitute a decent emergency fund. Apart from said fund, you also need another savings account for investments and other major financial projects you have in mind.

Interest rates for your savings

If you do open a savings account, you’ll have to find out how much your savings earn in interest. If it’s a conservative account then chances are that your interest rates are very high compared to the interest rates your debt is costing you. In this sense, your debt’s interest will be cancelling out the amount you’re earning from your savings, which is why you need to be smarter where you put your money in. If you were willing to take risks, maybe you’d want to invest in high paying investment mediums such as stocks or mutual funds.

Financial goals

Depending on your financial goals, you can move forward and decide which one to prioritize best. Provided that you already have an emergency fund, the next step you need to do is find a balance between saving money and paying off debt. If you’re especially being weighed down by debt, it would make sense to focus on getting rid of your high interest debt for a period of time while still setting aside a certain percentage for savings. Again, the key is to strike a balance that works best for your financial situation.