Should You Pay Down Debt or Build Savings First?

Written By Guest Post
Last updated September 18, 2019

Note: We receive a commission for purchases made through the links on this site. Our sponsors, however, do not influence our editorial content in any way.

Personal Finance
September 18, 2019

Simple. Thrifty. Living.

Saving money is important not just to have an emergency fund, but also to build up a retirement savings. The more someone can put away now, the more they’ll have invested in a retirement fund. However you may be forced to limit your contributions toward savings and retirement because of looming debt.

So should you focus on saving or paying down debt?

If one were to choose to focus solely on paying off debt, one could assume that the debt could be paid off much faster. Given that significant payments were made regularly, and not just the minimum amount. This approach could leave you high and dry when a financial emergency occurs. An emergency might require the use of credit cards, which only adds to debt.

Essentially, the decision that must be made is based on how much debt a person actually has. Does your income allow you to pay off your debts quickly or are you overwhelmed by the minimum payments?

Credit cards and other debts with high interest rates should take top priority. The more money that can be thrown at the debt will serve to reduce both the debt and the interest each month. Essentially saving you money in the long run.

To make it easier to pay down debt quicker, many also consider transferring balances to cards with lower interest rates or consolidating debt with a low-interest personal loan.

Fixed Payments

If a debt has fixed payments, such as student debt, car loans, or a mortgage payment. Overpayments will be applied to the total of the loan but wont reduce the interest or lower the monthly payment. So with fixed debts, its possible to add some funds to savings as well if there is any to spare.

Saving first without paying off debt means that there will be much more interest to pay over the long term. But if the debt consists of only fixed payments where paying it off first wont make much of a difference. Say a mortgage or student loans then making sure you have a solid emergency fund should be the priority. Additionally if your debt has a very low interest rate, then it could be a good idea to at least save up enough for an emergency fund. Transferring a balance to a 0% APR card can save you a ton, especially when trying to pay your debt off. Here are our favorite balance transfer cards.

Ultimately, is it best to pay down debt or contribute to savings?  Figuring out that balance depends on income and the debt total.

About the Author

Guest Post

  • No comments yet. Be the first to get the conversation started. Here's some food for thought:

    Do you have any thoughts?

Submit a Comment

Your email address will not be published. Required fields are marked *