Deciding whether to save money or pay off debt first is a question many people face. Managing debt while trying to build some savings can feel tricky. You might worry that focusing on one means neglecting the other. The good news is you don’t have to choose, you can work on both at the same time.
Why Saving and Debt Repayment Should Go Hand in Hand
Paying off debt is important because interest costs can add up quickly, making it harder to get ahead. But putting all your effort into debt repayment without having any savings could leave you vulnerable to unexpected expenses, like car repairs or medical bills. Without a savings buffer, these surprises can force you to borrow more, setting back your progress.
On the other hand, focusing only on saving without addressing debt means interest charges keep growing, which also makes financial stability difficult.
The best approach is to save while you pay off your debts, balancing both priorities.
Start Small with an Emergency Cushion
It’s smart to begin by setting aside a small emergency fund. This fund acts as a financial cushion when unexpected expenses come up. Financial advisors often recommend starting with around $500 (or the equivalent in your local currency). This amount can cover minor emergencies and reduce the chance of needing to take on more debt.
Over time, try to increase this to cover one to three months’ worth of basic living costs such as housing, food, and utilities. Keeping your emergency fund in a high-yield savings account can help your money grow a little faster than it would in a regular checking account.
Even if your income fluctuates or your expenses change seasonally, having some cash set aside reduces stress and gives you flexibility. This fund can be the difference between managing a financial hiccup calmly or slipping deeper into debt.
Don’t Miss Out on Employer Retirement Boosts
At the same time, if your employer offers a retirement savings plan with matching contributions, it’s wise to contribute enough to receive the full match. This means your employer adds to your retirement savings based on how much you contribute.
Including this match in your savings strategy is important, even while you work on paying down debt. These contributions are a valuable boost to your long-term savings.
Starting retirement savings early benefits you over time because of the power of compound growth. For example, contributing just a small percentage now can grow significantly over decades. Even if retirement seems far away, getting into the habit of saving regularly can pay off big later on.
Target Those High-Interest Debts First
Once you have a basic emergency fund and are contributing enough to receive your employer’s retirement match, the next step is to focus on paying off high-interest debt.
Examples include payday loans, credit cards with interest rates above 15%, and other loans with steep rates. These debts can become costly and make it harder to improve your overall financial situation.
There are two popular methods to pay off debt. The debt snowball method focuses on paying off the smallest balances first to build momentum and motivation. The debt avalanche method targets the debts with the highest interest rates to minimize total interest paid.
Using an online debt payoff calculator can help you see how increasing payments could shorten your debt timeline. Seeing the finish line get closer with each payment can be a powerful motivator.
When to Seek Extra Help
If you find it hard to keep up with minimum payments or your unsecured debt is a large portion of your income, it might be helpful to explore additional support.
Nonprofit credit counseling organizations offer debt management plans to help you create a repayment schedule. In some situations, legal options like bankruptcy may be necessary to regain control of your finances. These resources exist to help you get back on track.
Asking for support can really lighten your financial load and help you find solutions you might not have considered.
Balancing Ongoing Savings and Other Debts
With high-interest debt under control, you can focus more on growing your savings and paying down other debts such as student loans, car loans, or lower-interest credit cards.
Aim to increase your retirement savings over time to about 15% of your gross income if possible. If you don’t have access to a workplace retirement plan, look into alternatives such as individual retirement accounts (IRAs) or similar options available.
Not all debt is equally urgent. Student loans or mortgages often have lower interest rates, so they might not need the same aggressive payoff strategy as credit card debt.
Extra Tips to Speed Up Your Debt Payoff
Trim discretionary spending by reviewing your budget closely and identifying areas to cut back, like subscription services you rarely use or dining out less often.
Exploring side gigs can also add meaningful income. Even a few extra hours a week doing freelance work, tutoring or part-time work can make a difference.
Debt consolidation is another option to consider. Combining multiple debts into one loan with a lower interest rate can simplify payments and reduce overall costs.
Automating payments helps avoid late fees and keeps you consistent, which is important for steady progress.
Finally, don’t forget to celebrate milestones. Paying off a debt, no matter how small, deserves recognition. These celebrations can keep you motivated through the process.
Keep It Balanced for Long-Term Success
There’s no single right answer when it comes to choosing between saving and paying off debt. What matters most is finding a balance that suits your situation. A solid approach helps you build a safety net, make use of any retirement contributions from your employer, and reduce high-interest debt that can weigh you down.
Progress doesn’t have to be fast or dramatic. Small, steady steps really do make a difference. As your income, expenses, or goals change over time, adjusting your plan can help you stay focused and build a stronger financial foundation.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers should conduct their own research and consult a qualified professional before making any financial decisions.