Should You Pay Off Debt or Save First? Here's What Experts Say
When it comes to personal finance, one of the most common—and confusing—questions people face is whether to prioritize paying off debt or building up savings. The answer isn't one-size-fits-all. It depends on your financial situation, goals, and the types of debt you carry. Here's what financial experts say to help you decide the best path forward.
The Case for Paying Off Debt First
If you're dealing with high-interest debt—especially from credit cards—most experts agree that paying it off should be your top priority. Credit card interest rates often exceed 20%, and carrying a balance month to month can quickly spiral out of control. According to certified financial planner (CFP) Sophia Bera, “If your debt is costing you more in interest than you could earn in a savings account, you’re losing money every month.”
For example, if you’re earning 4% in a high-yield savings account but paying 22% on a credit card, you’re effectively losing 18% on that money. In these cases, aggressively paying off debt can offer a guaranteed "return" on your money that no savings account or investment can match.
The Case for Saving First
Despite the logic of tackling debt quickly, most financial advisors recommend building a small emergency fund before going all in on debt repayment. Why? Because without a financial cushion, even a minor unexpected expense—like a car repair or medical bill—could force you to rely on credit cards again, digging you deeper into debt.
A common recommendation is to set aside at least $1,000 to $2,000 or aim for one month’s worth of essential expenses in a savings account. This gives you a buffer while you tackle your debt.
“Think of it as an insurance policy against going further into debt,” says Tiffany Aliche, a financial educator known as "The Budgetnista."
When to Do Both
In many cases, a hybrid approach works best. You can split your extra money between debt payments and savings—perhaps 70% toward debt and 30% toward savings. This method keeps your progress moving in both areas and offers peace of mind in case of emergencies.
If your debt has relatively low interest (like federal student loans or a mortgage), experts often suggest contributing to retirement savings at the same time, especially if your employer offers a matching contribution. Skipping that match is like leaving free money on the table.
The Bottom Line
Whether you should pay off debt or save first depends on your interest rates, emergency fund status, and long-term financial goals. Here's a quick summary to guide you:
Pay off debt first if it has a high interest rate (typically over 7%).
Save first if you don’t have at least $1,000 in emergency savings.
Do both if your debt interest is manageable and you're financially stable.
Ultimately, the goal is to gain control over your finances, reduce stress, and build a secure future. Whatever strategy you choose, consistency is key. Start with a plan and adjust as your circumstances change.