Should You Pay Off Debt or Save Money?

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Pay off debt or save money, emergency fund, budget, debt pay off plan, credit cards, extra income

The question is, do we pay off debt or save money first? Around 80 percent or so of households in America hold some form of debt.  I am pretty sure I can say that most, if not all of us, want to get rid of that debt. 

The debt we hold comes in many forms.  Credit cards, student loans, home mortgages, car loans, and more.  How many of us can pay cash for a new home or a college education?

Pay off debt or save money?  There isn’t a cut and dry answer to this.  The answer will differ in each unique situation.  Each of us has to decide which one do we do?

Do you have to choose between the two, pay off debt, or save money?

If you have a 25 percent interest credit card and you don’t have any savings to fix your car when it breaks down, we need to make changes, and I think the answer is simple.

However, personal finance decisions are rarely simple.

I can tell you the path I am taking if you don’t already know from reading some of my other articles.  I am doing both!  I save some extra money each month, and I pay extra to my debt each month!

Is that the right way of doing things?  I don’t know, but it works for me and my financial situation.

Two Schools of Thought

There are two different ways to look at this question, pay off debt, or save money?  Mathematically and emotionally!  However, as I already pointed out, you don’t have to do one or the other!  You can do both, pay off debt and save money!

School of Thought #1 – Mathematical

Where does your money work the hardest for you?  That is one way to look at it.

Can I earn more money from my savings or investment account return rate than what I pay out on interest?

If I have a loan that is 4 percent interest, but I can earn a 6 percent return on investment, my money will work harder for me by investing.

However, if you are reading this, you probably have way more debt then just one loan at 4 percent interest. 

If you do, then you probably won’t make more money than what you are paying to that 25 percent interest credit card!

School of Thought #2 – Emotional

Having debt is a bummer.  It is frustrating; it can be depressing if it gets out of hand, it just ISN’T something we enjoy!

Paying our money out each month to the creditors wears us down! 

Becoming debt-free can create some peace of mind and allow us the freedom to focus on other things in life.  You see when we are in debt, do we save towards retirement?  Do we buy the things we want?

Emotions can make or break this entire process!  If we didn’t allow emotion to control our actions, we wouldn’t even have as much debt as we do, and most likely, we would only have a home mortgage!

Pay Off Debt or Save Money?

As I already said, there is no right or wrong answer to this question.  Well, there is a wrong answer, and that is not to do anything!  You have to start to be successful with any goal or plan you have.

You have to decide which path you need to take for your financial situation.  Most of us are going to choose what has the most significant positive change, emotional or mathematical.

However, below, we have laid out a step by step plan that we believe is best for people with substantial debt.  The goal is to get out of debt or minimize it the best we can so we can better plan and save for our future!  

Step #1 – Create a Budget

Figuring out where your money goes, and the areas you can cut back or minimize your spending is critical!

Having a budget will free up money you didn’t know you had!  The money you free up by budgeting can be used to pay off debt or save money!

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Step #2 – Save an Emergency fund

I cannot stress this enough!  I genuinely believe that without an emergency fund, we will NEVER be debt-free!  Just since I started trying to pay off my debt how many months ago, I have had multiple situations come up.

We all need at a minimum, 1,000 dollars in savings ready to go for emergencies!  If you don’t have that, you are not alone. 

According to a 2019 Bankrate survey, only 40 percent of Americans can cover a 1,000 dollar emergency out of their savings.  Thirty percent of respondents said they or a family member, during the last year, had an unexpected expense.

I believe if you have less than 1,000 dollars in savings, that should be your TOP priority!

My truck needed repair, 1,230 dollars.  My air conditioning in our house required two repairs now.  The first one was over 1,000 dollars, and the second one was just over 300 dollars.

There have been others, such as our clothes washer breaking down, but the two most expensive were the air conditioning and my truck.  Most of these situations, I was able to cover with my emergency fund!  I only had to use a credit card on one of them, which set back my debt payoff!

I suppose that either way, emergency fund or credit, having an expense like this come up, sets back our debt payoff.  Even if we use our emergency fund, we still have to recuperate that fund.  However, using my savings doesn’t cost me more money in interest!!

If you struggle saving money, check out Digit!  I have been using Digit since February 2015, and I cannot recommend this enough!  Easy money saving on your part, absolutely effortless!  Digit does all the work for you!

For more emergency fund pointers, you can read Emergency Fund: First Step to Debt Free!

Step #3 – What Are Your Priorities

As I said, I save a little each month and pay extra towards debt each month.  Now, I pay more towards debt than I save currently.

I have more than 1,000 dollars in my emergency fund, so I feel this is the best course of action for me.  Simply put, the more debt I pay off, the more I can save or pay to the next creditor on my list.

You need to decide, what is more, important to you?  What fits your financial situation better?

If you have high-interest debt, above 10 percent, maybe that will be your priority over saving.  However, in a bit, we will discuss your debt pay off order!

Are you planning on buying a house soon?  What is your debt to income ratio?  Is it so high a lender won’t give you a mortgage?  How much do you have saved for a down payment?  You see, there are so many different factors for each of us.

Step #4 – Make a Plan for Your Debt Pay Off

Having a plan is another crucial step.  Most importantly, do you pay off your lowest balances or your highest interest rate debts first?

Paying off your lowest balance debt, followed by your next smallest balance is called the debt snowball.  Paying your highest interest rates off first is the debt avalanche.

You can read more about that here – Debt Snowball: Best Debt Payoff Method?

Do you save more money, pay less towards your debt?  Pay more towards your debt and save less money.  Split your extra money down the middle for savings and additional debt payments?

Again, this all depends on your situation.  As I said before, to start is the key!  Make a plan, and start!

Step #5 – Stick to Your Plan

Now that you have developed a budget, and a plan for both your savings and your debt pay off, there is only one step left.

Stick to the plan you developed!  I know you will have to deviate when emergencies come up.  We can’t plan for everything all the time! 

Keep your budget up to date, take care of the unexpected financial obligations, and move forward one day at a time, and we will all get to the finish line and be debt-free.

Optional Steps

Something often overlooked when trying to pay off debt or save money is how to make extra money.  Not only making extra money but using tools to save money on what you spend!

For example, I make over 100 dollars per month, taking online surveys in my spare time.

Another great way to earn some extra income is Swagbucks. Watch some videos, take some surveys, play games, go shopping online! Lots of different ways to earn money!

I save over 200 dollars per month using other means such as:

Amazon Subscribe and Save:  By adding a minimum of five items to be auto shipped monthly, we save 15 percent.  We ALL have way more than five things we frequently buy!

Ibotta:  We get money back on everyday purchases through this app, which works with over 300 retailers!  They have paid out over 575 million dollars!

Trim Financial:  Trim saves me money whenever it can, but not every single month.  Trim automates savings by negotiating your cable bills, canceling unwanted subscriptions, and much more!  They save their users over one million dollars per month on average!

See Cheap Tasty Meal Plans!

5dollarmealplan:  Have you ever added up the amount of money you spend eating out per month?  If the answer is no, please go back and review step #1!  You need to know where your money is going!  Anyways, I know we are all super busy with our lives.  If you don’t have time to meal plan/prep, you can make it a little easier by using 5dollarmealplan!

To Sum Up…

This decision, pay off debt or save money, is NOT an easy one.  I know because I live it every day just like all of you!

At the end of the day, though, we have a decision to make, and we have to make it!  Listen, try out my way, and if that doesn’t work, tweak it until it does work!

Paying off a substantial amount of debt does NOT happen overnight.  It takes a solid plan and lots of hard work and perseverance!

We each have to figure out which way makes the most sense for us and how it aligns with our ultimate goals!  For example, my ultimate goal is financial freedom: to have ZERO debt and the financial means to do the things I want to do in life!

YOUR TURN – What are you doing for your financial goals?  What path do you recommend, pay off debt, or save money?  Let us know in the comments and please, if you enjoyed this, share it with your family and friends!

Survey Junkie

3 thoughts on “Should You Pay Off Debt or Save Money?

  1. In my opinion you should pay off debt first, remember posting paying of a debt means going even more into debt so the earlier you pay it off, the better.

  2. Definitely a fan of saving money and paying off debt at the same time if you can do both. Once you have some savings, you can cut down on the odds of having to add to your debt in an emergency. And it’s smart to keep savings in the right place, too. A online high yield savings account is an infintely better choice than one from a brick and mortar bank.

    1. Rebecca, I agree. As you know from reading this, I am doing both. Once my emergency fund is where I want it to be I will switch to putting more into my debt.

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