Should You Pay Off Debt or Save? 3 Questions to Help You Decide

Is it better to pay off debt or save extra money? It can be difficult to determine the right answer, so we asked seven personal finance experts for their best advice. They identified three important questions to ask yourself when deciding if you should allocate extra money toward savings, paying off debt, or perhaps even investing. Let’s jump in:

1. How much do you currently have in savings?

“At first, you need to build an emergency fund with at least three to six months’ pay. While you may not be paying down your debt, an emergency fund puts you in a more durable and confident financial position. Things happen, and an emergency fund is a safety net that every consumer should have.” Nate Matherson, LendEDU

“If you don’t have an emergency fund, or only have a few dollars saved, you’ll want to have some money set aside just in case.” James Hendrickson, SavingAdvice.com

“My biggest piece of advice is to build up an emergency fund first before making a major effort to pay off your debt. Ideally, you’d like to have three to six months of life expenses saved up so you can handle any unexpected expenses without going into more debt.” Jeff Proctor, DollarSprout

“Think about it this way: The interest on your debt will generally cost more than what the interest on your savings will earn you. However, it’s important to build up your emergency savings account. While you’re still getting on your feet at the beginning, I recommend paying the minimum on your debt while siphoning the rest off into your emergency fund. It’s good to have about three or four months’ worth of living expenses saved up. Once this is covered, start increasing your debt payments.” Jennifer McDermott, Finder

1. What are the interest rates on your debts?

“Although I strongly believe that savings are an important financial safety net, paying off debt becomes a priority when the interest rate payment on your debt is high or your minimum required monthly payments are barely making a dent. You know—those debts that seem to be growing despite your regular payments. When creating a debt repayment strategy, come up with a number that you feel comfortable with having in your savings account at all times, and then once you’ve reached that number, switch gears and aggressively work towards paying off your debt.” Danielle Desir, The Thought Card

“Once you have an emergency fund built up to a comfortable size, then it’s probably a good time to get serious about allocating extra income toward your debt. Starting with the highest APR (annual percentage rate) debt first—such as a credit card—is usually the smartest option.” Jeff Proctor, DollarSprout

“Expensive debts should be paid off as soon as possible. If you’re paying down a high-interest rate credit card, bank account overdraft fee, or payday loan service charge, you’ll want to pay that off before saving.” James Hendrickson, SavingAdvice.com

“If an individual has a low interest rate on a mortgage and wants to save more for retirement—if they have 10+ years until they'll need the funds—they can afford to invest rather aggressively. If they're comfortable doing so, putting more towards retirement would be the way to go. You essentially ‘lock in’ the rate of the return at whatever your interest rate is on debt. If your mortgage is 4%, you'll likely earn 7-9% as a long-term equity investor. If you have high-interest debt, however, it's another story. Credit card debt is usually the main culprit. You likely won't earn enough on your investments even over long periods of time to justify holding credit card debt with an interest rate of 15% or higher.” Levi Sanchez, Millennial Wealth

“Consumers should calculate the opportunity cost of paying down their debt vs. saving. Most high-interest savings accounts and CDs (certificates of deposit) pay less than 2% interest on an annual basis. In most cases, the consumer will save more money over the long term by repaying the debt. If the consumer has multiple types of debt, they should prioritize their payoffs by targeting the debt with the highest interest rate first. In general, consumers should pay off high-interest credit card debt before low-interest debt like student loans or a mortgage.” Nate Matherson, LendEDU

“Logically, it makes more sense to do what costs less. If the annual interest on your debt is $1,000 but you could earn $2,000 per year investing or saving that extra money, then it makes more sense to invest or save. But if the return on your investments is less than the accumulated interest on your debt, then saving money would cost more in the end. In a situation where the difference between saving and investing is nominal, it comes down to your debt tolerance, or your level of comfort with debt. Is the debt causing you undue stress? If that’s the case, it’s better to build up a small emergency fund and work towards paying down the debt, then focus on saving more money later.” Megan Robinson, Goodbye to Broke

1. What are your financial goals?

“This sounds trite—and it is—but it is also important. If your debt is causing you to stress out, paying it off may give you a greater sense of psychological satisfaction than saving. Alternatively, if your goal is a house or a new car, saving up the down payment may be more in line with your goals. In any event, it’s important to consider what you want to achieve.” James Hendrickson, SavingAdvice.com

RISE is proud to help hardworking Americans build better money habits. Check out our collection of free, interactive tools for setting savings goals and managing debt.