Should I Save or Pay Off Debt?

Quick Answer

If you have debt such as payday loans or high-interest credit cards, paying these off first will save you money and help you refocus on other financial goals. But if you don’t yet have an emergency fund, prioritize saving a little bit either before or alongside debt payoff.

A woman deciding between paying off debt and saving money while working on her laptop.

It's often a better idea to pay off debt before saving extra money. That's because you won't have to pay big interest charges once the debt is gone, and that's likely to add up to more than you'd earn in your savings account.

But sometimes, saving is the better bet. It's important, for example, to always have a little bit saved for emergencies. That can be $200 or $500, if that's what's possible at the moment, with the eventual goal of saving three to six months' worth of expenses. But if you have nothing at all saved, try to set aside a little bit now.

Here's when it's best to pay off debt first, and when it's best to save.

When You Should Pay Off Debt Before Saving Money

In these situations, paying off debt should typically come before saving money:

  • You have payday loans. These often come with such high finance charges—reflecting annual percentage rates (APRs) well into the triple digits—that taking them out of the financial equation is the single most important step you can take toward more financial security. Pay these loans, which typically come due in two weeks or by your next paycheck, in full to avoid extra fees. To do so, consider earning extra income or cutting back on expenses.
  • You have high-interest credit card debt. The average credit card interest rate hit 20.09% in February 2023, compared with 14.56% in the first quarter of 2022, according to the Federal Reserve. That makes reducing credit card debt a top priority, perhaps even more than in previous years, due to the particularly large amount of interest you stand to save by paying off the debt.
  • Carrying debt is severely impacting your happiness. For some people, maintaining some debt and paying the minimum toward it feels like no big deal. For others, having debt is a weight that they're desperate to lift off their shoulders, and it deeply affects the way they see themselves and the world. If that's you, prioritizing debt payoff—after starting an emergency fund—is a worthwhile approach.

Pros and Cons of Paying Off Debt First

These are the benefits you can expect when choosing to pay off debt first:

  • Interest savings: When you pay off debt before saving money, you stand to save money in interest that you'd otherwise spend maintaining your debt. This can be hard to grasp, so use a debt payoff calculator to see exactly how much interest you'd save if you paid off the debt sooner.
  • Lower credit utilization: In the case of credit card debt, you could also see a boost to your credit score, which may be a priority if your score had previously been suffering. While paying off a debt early won't necessarily positively impact your score on its own, it will lower your credit utilization rate, or the amount of debt you have relative to your credit limit. Experts recommend using no more than 30% of your available credit at any point; keeping your utilization rate at or below 10% is ideal.

But there are drawbacks too:

  • Potential for more debt: Most significantly, not giving savings precedence could lead to a continued cycle of debt. If you are faced with an unexpected car repair or medical bill, for example, and you don't have a big enough emergency fund, you may lean on credit cards to pay for it, increasing your debt load.
  • Missing out on investment growth: If you pay off debt before saving in a retirement fund or brokerage account, you lose out on compound returns. The earlier you save, the more time your money has to grow and for interest to stack on top of interest. Ideally, you'll pay off debt while saving at least a little money for retirement at the same time.

When You Should Save Money Before Paying Off Debt

It may make sense to save first in these circumstances:

  • You have no, or very little, cash saved. An emergency fund will protect you from taking on further debt. Regardless of the type of debt you have, try to set aside money each month to eventually have three to six months of basic expenses saved, which is what experts recommend. That will give you the security to cover rent, groceries, utility bills and minimum debt payments if you unexpectedly lose your job.
  • You only have low-interest debt. You can consider skipping right to saving if you only have federal student loans, for example, or a mortgage. These types of debt have relatively low interest rates, so you can likely safely pay the minimum and focus on saving with any extra cash you've got.

Pros and Cons of Saving Money First

Saving money before tackling debt has these benefits:

  • Forward momentum toward other goals: You may feel a sense of accomplishment if you're able to save for retirement and make progress on your down payment for a house, even though you have other debts. Depending on the size of the debt and the interest rate, it could be a better idea to start saving early than to wait until the debt is gone.
  • Security in case of financial setbacks: It's hard to overstate the importance of having money set aside for unexpected crises. The emotional impact of a death in the family requiring a cross-country flight, for example, is hard enough; knowing you can pay for it from your emergency fund may be worth taking some more time to pay off debts you want to get rid of.

Here are the possible drawbacks:

  • Little additional progress on your debt: When you decide to save first, you forgo the possibility that you could be debt-free sooner, and you lose out on interest savings. Adding extra principal payments to your student loan each month, for example, could reduce the life of the loan, and thus the interest you'll pay, making debt payoff an attractive option.
  • Continued impact on your credit score: Paying only the minimum toward your credit card debt could keep the balance high relative to your credit limit. That won't let you actively improve your credit utilization and, as a result, your credit score. Improving your credit may not be a priority right now, but if it is, saving first won't have as great an impact.

How to Pay Off Debt

Pay off debt by sending more than the minimum required to your creditors each month. It can be hard to know where to start, since you'll have to free up cash you may not have known you had access to. Here are a few ways to get there.

Debt Payoff Strategies

Focusing on making more than the minimum payments on your debt can be difficult to wrap your head around at first. Here are some ways to accelerate your debt repayment:

  • Review your budget. Whether or not you keep a regular budget, simply take a look at your bank or credit card statements and get a general sense for patterns in your spending. Is your cellphone or cable bill so high it's rivaling your grocery bill? Are restaurant meals your biggest expense? Adjust your spending to free up more money for debt payment.
  • Cut nonessential expenses. Take the information you've gleaned from analyzing your spending and make one change to start. If you downsize your cellphone plan, for example, and save $50 monthly, set up autopay on your credit card bill to be $50 more than the minimum each month.
  • Use the debt snowball method. When deciding in which order to pay off debt, one option is the debt snowball method, which recommends paying down the smallest balance first, then putting the money you used to pay off that debt toward the next balance. This won't lead to the greatest interest savings, but it's a great way to feel motivated to continue slashing your debt.
  • Or use the debt avalanche method. An alternative is the debt avalanche method, which prioritizes the highest-interest debt first. This can take longer if the balance on the first debt you target is large. But you'll save more by getting these debts out of the way, and it's a good option if you have payday loans or very high-interest credit card debt.

Debt Consolidation Options

Debt consolidation lets you combine multiple debts into one account, streamlining payoff and potentially reducing your interest rate. If you have a good credit score, you could save a significant amount in interest through consolidation. The options include:

  • A balance transfer credit card with a 0% interest promotional period: If you're eligible for a balance transfer card, you can move various cards' balances to one card and have up to a year or more to pay down your debt—without racking up additional interest charges. Make sure you get rid of the debt in that time to avoid paying interest once the promotional term ends.
  • A debt consolidation loan: If you qualify, you may be able to bundle multiple types of debt, not just credit cards, with a debt consolidation loan at a lower interest rate than you currently have. If you have just a single credit card balance to pay off, though, a balance transfer credit card is likely a better option.

How to Save Money

If you opt to save money first, or alongside debt repayment, consider starting with an emergency fund in a high-yield savings account. These accounts are typically available at online-only financial institutions, which can be inconvenient if you deal a lot with cash. But for a savings account that you don't plan to draw on often, the potential to rack up a lot of interest is an enticing perk.

Your next savings goal should be saving for retirement, since giving your invested money time to grow is an important element of long-term financial planning. If your employer offers a retirement plan—typically called a qualified plan —with a match, it's an important benefit to take advantage of. Save at least as much as you need to—say, 3% of your income—to capture the full match offered.

Beyond retirement, you may wish to invest for short-term goals in a brokerage account, save for a home down payment, keep a specific savings account for vacations or save for a child's college education. Identify the most important goals to you, then set up automated transfers to each account. You may even be able to send money directly from your paycheck into multiple accounts via a direct deposit split, if your employer offers it.

The Bottom Line

Both saving money and paying off debt are worthwhile goals, but with limited funds to work with, you may have to choose one or the other—at least initially. No matter which method you choose, keep an eye on your credit with credit monitoring. You'll receive alerts when something changes so you can take action quickly to avoid hurting your credit score.