Pay Off Debt or Save: What Should You Prioritize First?

Whether you should pay off debt or save money depends on your financial goals, the type of debt you have, interest rates and your current savings. For example, if you're carrying high-interest debt, paying it down quickly can prevent balances from growing — especially if you’re considering options like a personal loan to consolidate that debt. On the other hand, if you have little to no savings, it’s important to build at least a small emergency fund. Ultimately, the goal is to strike a balance between both.

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Quick Take

• Build a starter emergency fund of at least $1,000.

• Focus on paying down high-interest debt first — 6% or higher.

• Aim to save three to six months’ worth of expenses in a high-yield savings account.

• Contribute enough to your 401(k) to earn an employer match.

• Use a split approach where you pay down debt while continuing to save.

Debt vs. Savings: Your Decision Guide

Here’s a side-by-side look at when to focus on debt versus savings:

Pay Off Debt vs. Save First: Pros and Cons

Deciding between saving and paying off debt comes with trade-offs. Here’s what to consider:

Pros and Cons of Paying Off Debt First

Pros and Cons of Saving First

When Should You Focus on Paying Off Debt?

You may want to prioritize paying off debt if you have any of the following:

• Payday loans: These are high-interest loans with rates as high as 400%.

• Credit card debt: The average APR on credit cards is 21%.

In addition to the types of debt you carry, consider these factors:

• You have high-interest debt: "These debts can grow, and clearing them first frees up money for other goals, like saving and investing," said Ronnie Allan, head of consumer credit cards and personal lending at PNC Bank.

• You have other pressing debts, like collection accounts or loan delinquencies: In this scenario, consider seeking outside assistance or exploring more extreme solutions to get out of debt, such as a debt management plan, consolidation or credit counseling.

• You're paying more interest than you'd earn from savings: You should divert more disposable income to satisfying outstanding debts, as you're losing more than you're gaining in interest.

• Your debt is keeping you from a mortgage or other financial goals: Consider prioritizing payoffs if your outstanding balances exceed your debt-to-income (DTI) ratio, particularly if you're looking for approval on a new loan.

When Should You Prioritize Saving?

Here are a few scenarios where you should prioritize saving first:

• You don't have an emergency fund: "This savings account will protect your financial well-being as [it] gives you a cushion to pay for unexpected bills and emergency expenses," said consumer finance expert Andrea Woroch. "Without these savings, you'd find yourself borrowing money or using a credit card to get through a tough financial time."

• Your debt has a low interest rate: These balances are generally easier to manage and less of a threat to your financial health.

• You have a specific short-term savings goal in mind: Wanting to go on a vacation, planning a wedding or a big move? You should avoid taking on extra debt to finance these scenarios and focus on saving first.

• Your employer offers a 401(k) match: This benefit is essentially extra income and a way to lower your annual taxable income, as the money you save in these accounts is tax-deferred.

A Simple Plan To Balance Saving and Paying Off Debt

Here are a few simple steps to help you balance saving and paying off debt:

1. Check your interest rates: Understand how each type of debt fits into your overall financial plan. Not all debt is equal — for example, a mortgage may support long-term wealth building, while high-interest balances can quickly grow. This can help you decide which debts to pay down now and which may be less urgent, especially if you're considering to pay off a personal loan to reduce interest costs.

2. Build an emergency fund: If you have an emergency fund, when an unexpected expense happens, you don’t have to dip into investments or your checking account. You can also avoid getting a loan, so you effectively prevent new debt.

3. Tackle high-interest debt first: You want your money to work hard, but also in the smartest way possible. Allocate extra funds for your high-interest debt so that as this balance decreases, you have more cash to dedicate toward paying off other debts or saving money.

4. Reassess your plans: Evaluate your plan every few months or after major milestones — marriage, divorce, birth of a child. You’ll be able to catch ways you can save more or use your money in the best way toward your debt.

👉Pros and Cons of a Personal Loan

Real-World Examples

These examples show how different situations can affect your decision:

When You Should Adjust Your Strategy

There are some exceptions that may change the order in which you handle debt.

• Credit card promotions that have a 0% APR: If you have high-interest credit card debt that you can transfer to this new credit card, you could buy yourself more time to pay the minimum and dedicate your funds to save or pay down another debt.

• Federal student loans: You can afford to pay the minimum and also save or make that car payment.

• Employer match: Always take advantage of the employer match on a 401(k) plan.

Final Takeaways

• You should be able to adopt a strategy where you can save as well as target debt.

• A high-yield savings account can help your existing funds grow and is a liquid investment in case you need to withdraw funds.

• Look for ways to lower your credit card debt by either transferring balances that offer 0% APR for the first few months or paying more than the minimum every month.

• If you have federal student loans, there are flexible payment options with lower interest. You can pay these loans off and save at the same time.

Key Terms To Know

• Emergency fund: This is an account you have set aside to cover unexpected expenses.

• APR: The interest rate that you pay on borrowed money.

• High-interest debt: Debt where you’re paying more than 6% interest.

• Compounded interest: Interest that accumulates on top of your original interest.

• Minimum payment: The smallest amount you can pay on your debt.

Saving vs. Paying Off Debt: FAQs

Still unsure which to prioritize? These FAQs can help:

Should I pay off debt or save first?

Ideally, you should have a starter emergency fund first — at least $1,000 — and then target paying off debt.

How much should I keep in an emergency fund?

You should keep at least three to six months of expenses in an emergency fund.

What interest rate makes a payoff better than saving?

If your debt interest is over 7%, you should try to address debts first.

Can I do both at the same time?

Most financial advisors recommend doing both. Depending on the debt, more of your funds may be going to pay off bills, but make sure you keep an amount for a savings account.

Do student loans change the strategy?

Federal student loans tend to have lower interest rates and flexible repayment options. It’s possible to save and invest while continuing to pay off your student loans.

Jeanine Skowronski contributed to the reporting for this article.