Should I prioritize saving or paying off debt?
There are times when paying off debt makes sense, but you’ll need a decent savings all the time.
It’s a tricky question — most people have some debt, and everyone should have a decent amount of savings. The answer as to which one to prioritize comes down to your financial situation, the type of debt you have and how large of a safety net you’ve got saved up.
When to focus on saving
The simplest answer is: If you don’t have an emergency fund at all, it’s time to focus on saving regardless of how much debt you have. It’s typically recommended to have at least three months of expenses saved up — ideally, six months.
Based on the average and reported costs of housing, utilities, health insurance, groceries and credit card minimum payments, most Americans need at least around $7,000 to cover three months of typical expenses. Of course, the amount you need to save for your expenses varies, and you’ll also need to factor in things like car payments, personal loans, auto insurance and other monthly costs.
To be clear: Even if you’re heavily focusing on savings, you should still make minimum payments on all your debts to avoid late fees, defaults and credit score damage.
Not all debt is bad
There’s a good chance that any debt you’ve borrowed is accumulating interest charges. This means your car loan, home loan, student loans, credit cards and so on, are likely building up some interest. The longer you take to pay down those outstanding balances, the more it costs you in the long run.
While it’s important to keep that in mind, it doesn’t mean you need to rush to pay everything off all at once. Debt itself isn’t morally good or bad — it just is.
In fact, having some debt is beneficial, especially to your credit history. Having no debt or active loans can lead to a poor credit score since you’re not proving your ability to repay debt, because you have no debt. Of course, too much debt can be “bad” because you might need your whole paycheck to cover your loans and have nothing left to save.
When to focus on paying off debt
High-interest, short-term consumer debt is worth prioritizing. This means high-interest things like:
- Credit card debt
- Personal loans
- Payday loans and cash advances
- Buy now, pay later loans
Most of these loans have high interest rates, typically well above 8% to 10% APR. With some payday loans, you could see APRs as high as 200% to 300%. The average credit card interest rate was 24.25% in November 2023, as reported by Forbes Advisor’s rates report. With rates that high, only making minimum payments can cost you big money over time, and it’s worth it to pay these debts off quickly.
If you have a lot of high-interest debt, it may also be worth checking out debt consolidation loans, which are typically large personal loans. Consolidating your debt means paying off multiple high interest loans with one lower interest loan, with the goal of saving on interest charges and organizing your finances.
Debt that can be paid down as normal
There are low-interest loans that you don’t necessarily have to rush to pay off if you don’t want to, such as:
- Car loans
- Home equity loans and HELOCs
- 0% APR credit cards
With HELOCs and home equity loans specifically, you may face prepayment penalties, which means you’ll be charged if you pay them off too fast. So, while it’s great you want to pay off debt as quickly as possible, read through your loan documents carefully for those types of penalties.
Paying off expensive debt can lower your emergency fund needs
Knowing when to save and when to pay off debt is a balance, and having too much debt can make it harder to save. You can get two birds with one stone by paying off your expensive debt because the fewer bills you have, the less you’ll need to save up in your emergency fund.
No matter how much debt you have, it’s a good idea to set some money aside each month, even if it’s $5. Putting your money into a high-yield savings account can make saving faster, and many banks and fintechs offer APYs as high as 5%. Putting your savings in a high-APY account can also help your money battle inflation and meet your savings goals faster.
If you’re overwhelmed with the number of creditors you owe, it may be time to consider debt relief programs or debt consolidation.
- “Average monthly apartment rent in the United States from January 2017 to February 2023, by apartment size”, Statista, March 24, 2023
- “U.S. residential electricity bills rose 5 percent in 2022 after adjusting for inflation”, Daily Energy Insider, June 01, 2023
- “How Much Does Health Insurance Cost Per Month?”, Health Markets, March 21, 2023
- “Finder Consumer Confidence Index”, Finder, August 22, 2023
- “What Is The Average Credit Card Interest Rate This Week?”, Forbes, November 13, 2023
About the Author
Bethany Hickey is a personal finance writer at Finder, specializing in banking, lending, insurance, and crypto. Bethany’s expertise in personal finance has garnered recognition from esteemed media outlets, such as Nasdaq, MSN, Yahoo Finance and AOL. Her articles offer practical financial strategies to Americans, empowering them to make decisions that meet their financial goals. Her past work includes articles on generational spending and saving habits, lending, budgeting and managing debt. Before joining Finder, she was a content manager where she wrote hundreds of articles and news pieces on auto financing and credit repair for CarsDirect, Auto Credit Express and The Car Connection, among others. Bethany holds a BA in English from the University of Michigan-Flint, and was poetry editor for the university’s Qua Literary and Fine Arts Magazine.
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