Is it Better to Save or Pay Off Debt?

Establish an Emergency Fund

No matter what your debt situation is, it’s important to establish an emergency savings fund. How much you should have in an emergency fund depends on several details—number of household members, number of incomes in the household, types of bills, types of debt, and more. Because of this, there are no hard and fast rules when it comes to choosing a number to reach with your savings.

Even the experts don’t necessarily agree: Emergency savings should range from anywhere between one month’s worth of expenses to a full year.¹ You can do additional math to figure out your household budget and typical monthly monetary needs and expenditures, but a save range to shoot for is between three- and six-months’ worth of expenses covered.²

Turn data into insights with Excel

Make better decisions backed by data and insights

Learn more

Debt Repayment Strategies

After topping off your emergency fund—or having a solid start at establishing one—it’s time to start paying off your debts while you save. Start with any toxic debts you may have, which include:

• High interest rate credit cards
• Rent-to-own programs
• Title loans

These debts are toxic because they often come with high interest rates, which makes them difficult to pay off entirely. Get these off your books first.

Next, approach the rest of your debts. There are two popular approaches to paying down debts: the snowball method and the avalanche method.

• Snowball method. This method organizes debt repayment by amount owed:
  • Figure out how much of your monthly budget goes toward the minimum payment on each debt.
  • See how much of your monthly budget can go toward paying off debts on top off these minimum payments.
  • Arrange your debts by amount; ignore interest rates.
  • Start paying the minimum monthly payment plus extra debt payoff budget toward your smallest debt each month; continue paying the minimum monthly payment on the rest of your debts.
  • Once you pay off the smallest debt, take all the money you budgeted toward paying it off and put it toward the next-smallest debt in your list and repeat.
• Avalanche method. This method organizes debt repayment by the amount owed and interest rate:
  • Figure out how much of your monthly budget goes toward the minimum payment on each debt.
  • Arrange your debts by the amount owed, then by the highest interest rate.
  • Pay the minimum amount owed and any extra debt-paying budget on the debt with the highest interest rate every month while paying the minimum on your other debts. If you have two debts at the top of the list with the same interest rate, pay the one with the most outstanding first.
  • Once you pay off the debt with the largest interest rate, put all of that debt repayment budget toward the debt with the next-largest interest rate.

Don’t Forget Other Ways to Save While You Pay Off Debt

While you work to pay off your debts and top off your emergency savings fund, you can free up some additional cash and capture extra savings in a few other places:

• Employer-provided FHAs and HSAs. If your employer offers these health savings options, be sure to take advantage of them. You can use pretax dollars to pay for medical needs and save directly from your paycheck.
• 401(k) matching. Your retirement savings don’t need to slow down when you pay down debt. Keep contributing to your 410(k) but max out your contribution at the point to which your employer will match your dollars.
• Consider refinancing. This may be an approach that both saves money and helps you pay down debt faster. Whether you have student loan debt, a car loan, or a mortgage, depending on your credit health and current interest rates, refinancing a large debt may be appropriate for you. However, take care not to undertake a loan that will extend the amount of time for which you’ll pay and never, ever, transfer a secured debt to a credit card. If you choose to explore this option, work with a qualified financial advisor.

Paying off several debts at once can feel daunting. Adding in the necessity to squirrel away savings can make it even more stressful to navigate. But following steps known to be successful for repaying debt while saving will have you well on your way toward being debt free in a healthy, financially sustainable way.