Should I Save or Pay Off Debt?

Do both: Maintain an emergency fund so unexpected expenses don't wipe out your progress. And don't pass up an employer match on retirement savings; it's free money.

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Written by Sean Pyles
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Edited by Kathy Hinson
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Should I Save or Pay Off Debt?

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Paying off debt can feel like it has to be your only financial priority.

But you should do some saving while you’re paying down debt. Even a small cushion of emergency savings can keep you from going deeper into debt when an unexpected expense pops up. And you don’t want to miss out on free money from an employer match on retirement savings if it's available.

Here’s how to answer the question, “Should I save or pay off debt?”

Start saving now

Paying off your debt is important — but so is building financial resilience and planning for the future. Take these two small first steps before you tackle toxic debt:

Build your emergency fund

Even a small emergency fund can help keep your finances stable when a crisis hits. NerdWallet recommends building an emergency fund of at least $500 to start, then growing your reserves from there.

Use the 50/30/20 budget to help you allocate your funds so you can build up your savings. With this method, half your income goes to needs, like housing, groceries and transportation. Then 30% goes to wants, like entertainment and eating out, and the final 20% goes to debt payments and savings. Depending on your debt load and income, you may want to reduce your wants category and beef up your debt payments and savings.

If you’ve struggled to budget for savings in the past, try the “pay yourself first” method, where you set up a direct deposit to send a portion of your paycheck into a savings account rather than putting what you have left at the end of the month into savings.

Consider using a high-yield savings account for your emergency fund. These accounts are free to open and earn more interest than standard checking accounts.

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Nab employer match money

Retirement might be the last thing on your mind when facing the urgency of paying off debt.

But if your employer offers a match in a tax-advantaged account such as a 401(k), contribute enough to meet the maximum match. That’s free money.

Doing this now is important because you can’t get this match retroactively. Plus, amassing what you need for retirement depends heavily on the effect of compound interest over a long time period; getting a late start will cut into your ability to afford retirement.

Wipe out toxic debt first

Once you get your basic savings established, focus on paying off your toxic debts, like payday loans, credit cards with interest rates higher than 15%, car title loans and rent-to-own payments.

You should focus on these first because their high interest rates can eat up your budget and create a spiral of debt.

A debt payoff calculator will let you see when you’ll get out of debt with your current payments and how much faster you could ditch debt if you pay more each month.

Tip: Check out debt snowball and debt avalanche payoff methods to see which is right for you.

It’s also important to know when you might need help. You might be a good candidate for debt relief if:

  • You are struggling to meet your minimums and see no way to resolve your debt in five years.

  • Your total unsecured debt is greater than half your gross income.

Tools like a debt management plan from a nonprofit credit counseling agency or Chapter 7 bankruptcy can help you retire your debts faster.

Next, balance more savings and remaining debt

With your toxic debt under control, you can turn to building up greater cash reserves and retirement savings while working to pay off the rest of your debt.

If you’re putting just enough into your 401(k) to get the match, you can add more. Work up to saving 15% of your gross income toward retirement.

Tip: If your workplace doesn’t offer a plan, you have other ways to save for retirement, such as an individual retirement account.

Student loans, credit cards with interest rates of 15% or lower, or auto loans may be easier forms of debt to manage, but it’s still important to make a plan to repay what you owe.

You may be able to speed things up with some go-to tips for paying off your debt faster, including trimming expenses from your budget, taking on a side gig to drum up extra cash and exploring debt consolidation.

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