Asked on Reddit: Should I Pay Off Loans or Save?

Over on Reddit, someone recently asked for help deciding whether or not to pay off student loans early. Should they get rid of the relatively low interest rate loans or keep paying the minimums and stay on an aggressive path to saving for the down payment on a house?

Respondents largely urged the poster to put the money into savings or investments, where they are likely to earn a return greater than the cost of interest on the student loans. The student loan interest rates in question ranged from 3% to 4.5%, while interest rates for a 30-year mortgage currently hover just above 6%.

Meanwhile, the average annual stock market return is around 10% (not accounting for inflation), as measured by the S&P 500 index.

Still, respondents also acknowledged that the decision is largely a personal one and can vary based on the specific situation and available rates.

We asked a few financial professionals for their take on the question: Pay off loans or save?

Before anything else, create an emergency fund

Experts turned the question around. Can you pay your bills if you get in a bind?

Creating an emergency fund for unexpected expenses is one of the most important parts of financial planning, says Zack Gutches, a certified financial planner and founder of True Riches Financial Planning in Denver.

As a result, he suggests focusing on building up at least several months’ worth of expenses before paying off debt or considering long-term savings goals.

“That emergency fund is the foundation of your financial house,” he says.

A couple with only one earner or a single person might even want to strive for up to six months’ worth of expenses, Gutches adds. You’ll want to be able to cover the big expenses, like mortgage or rent, car payments, utilities and other non-negotiables.

Start by saving an amount that works for your budget and aim to build up a larger emergency fund over time. Make sure you stay up-to-date on your student loan payments and any other debts while you save. Neglecting those can result in loan default.

Balance short-term savings against other goals

The next priority is to evaluate savings goals for expenses in the next three years, such as a home purchase or a new car, Gutches says.

The Reddit poster said they had been aggressively saving for a house and were concerned that dealing with the loan would delay that goal.

To reach short-term goals, you may want to prioritize funneling any extra cash into dedicated high-yield savings accounts instead of paying off low-interest debt, including student loan debt, Gutches says.

One exception to that rule is if the debt is weighing down your mental health, Gutches adds. If it’s causing anxiety and worry, you might want to prioritize paying it off.

Pay off debt before increasing spending

There are other reasons to tackle what you’ve borrowed before prioritizing a new financial goal.

Paying off debt early can keep you from spending what you should save (but maybe won’t), says Jessica Smith, CFP and co-founder of Vitality Wealth in the Boise, Idaho area.

“If you’re just going to spend it, then the more optimal thing is to pay off the debt,” she says.

Similarly, Smith says, if you’re carrying high-interest credit card debt, that’s another reason to put the money toward paying off the debt early.

Try to do a little bit of both

How about a middle ground?

Ideally, you can try to put some money toward paying off the debt and some toward savings, so you’re working toward both financial goals at the same time.

“Often, we think of the decision as black and white, but for a lot of folks, you can do both,” Gutches says.

This could involve dividing the amount you can save each month in two. Put one half into a high-yield savings account and the other toward outstanding debt, for example.

“The decision is individual and unique to each person. There’s no right or wrong answer,” Gutches adds.

It could make perfect sense for one person to put their savings into an account earmarked for a future house down payment while another applies the cash to outstanding debt. In both cases, they are achieving their individual goals.