Should I pay off debt or save?

When to save vs. pay down debt

Before prioritizing debt repayment, evaluate your savings. Without an emergency fund, unexpected expenses can create financial hardship — even if you're focused on paying off debt.

If you have some savings, focus on eliminating high-interest debt to break the cycle of compounding interest and free up future funds. Paying down the principal reduces overall interest costs, leaving more room to save.

However, if your debt has low interest rates, it may be wiser to build your savings first while keeping up with regular loan payments. This balance helps you stay financially secure without relying on costly emergency loans.

» LEARN: Interest rates and how they work

Scenarios for when to save vs. pay off debt

It is always a good idea to pay off debt, but if you have no or little savings, it is usually better to build a financial cushion before you start dedicating extra money to your debt.

How to decide whether to save or pay off debt

If you’re trying to decide if you should pay off debt or save, the first step is to consider your income. You want to be sure that you can reasonably afford your monthly expenses in addition to debt repayment. Assess your financial goals, retirement plans and interest rates before deciding.

» MORE: Good debt vs. bad debt

1. What is my total annual income?

This will help you determine whether you can make monthly payments without falling behind or sacrificing any of your monthly must-haves, like food, gas or car payments. Even with a low income, you can pay off debt — but first, ensure you can afford essential expenses.

2. What are my financial goals?

Consider your current expenses and how they fit into your future financial goals. For example, if you know you have upcoming demands like home repairs or tuition, it may make more sense to save first. If you do not have savings for retirement, you may want to open an Individual Retirement Account (IRA) or 401(k). This may prevent you from paying off your debt right away, but the compounding interest from your retirement account will still help you save for your later years.

3. How much am I paying in interest?

Make a list of all your debts, including your balance and the interest rate. This will help you take a comprehensive look at your total debt so you can compare interest rates and decide whether a debt consolidation loan is best.

Consider your debt strategy

Most borrowers eliminate debt using one of two strategies: the debt snowball or debt avalanche method. The snowball method starts with the smallest debts and works up to the largest ones. The avalanche method targets the highest-interest debts first, reducing overall interest costs. Organizing your payments like this can help you stay on track with repayment goals while managing your finances responsibly.

» MORE: Debt snowball vs. debt avalanche

Strategies for balancing debt and savings

Several money management strategies can help you reduce your debt and build your savings over time.

• Create a budget: Account for your monthly expenses, such as housing, utilities, groceries and transportation. Add a line for your savings so you can work it into your monthly finances, depending on how much is left over.
• Pay more than the minimum: Paying the minimum amount on credit cards and loans means you will pay more interest over time because it will take you longer to pay off the loan. The bigger your monthly payment, the more you will save in interest over time.
• Talk to your employer: Your employer may have an employer-sponsored retirement savings plan, such as a 401(k). Automatic payroll deductions do all the heavy lifting for you, making it easier to save. Your employer may even match your contributions. This may not help you with your current debt, but it will help you grow your savings over time for the future.
• Use your credit card: Put your rewards credit card to work by using it to pay for your monthly bills. Some credit cards offer points for your purchases that you can trade for cash back or rewards. You can then use this cash to pay down your debt. Avoid overspending to ensure you can pay off your balance in full.
• Consider a debt consolidation loan: If your interest rates are high or you are having trouble managing your debt, you might consider a debt consolidation loan. This will combine all your debts into one monthly payment made to a single creditor. However, keep in mind that this can result in a hard credit inquiry, which can negatively affect your credit score.

» MORE: How much debt is too much?

Where should I put my savings?

The options below are generally considered some of the best accounts to save money. A financial advisor or debt counselor can help you choose the best savings option for your needs.

• Money market account: A money market account allows you to earn interest on your balance while benefiting from debit and check-writing privileges. However, you are limited in the number of transactions you can make and a minimum deposit may apply.
• High-yield savings account: A high-yield savings account is a popular option because you earn interest on your savings. It is a great fit for an emergency fund, giving you access to your cash when you need it.
• Certificate of deposit (CD): You can open a certificate of deposit account that earns interest for a set period. However, you cannot access your cash during this time, so it is not best for short-term savings.

» COMPARE: CDs vs. savings accounts