Pay Off Debt Or Save Money – Is One Better For You?

Should you pay off debt or save money? I wish this was a super easy article where I could just give you a clear answer about whether you should pay off debt or save money, but that’s just not how personal finance works. Every situation is different, and today, I’d like to go over different…

Michelle Schroeder-Gardner

Last Updated: November 8, 2020

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Should you pay off debt or save money?

I wish this was a super easy article where I could just give you a clear answer about whether you should pay off debt or save money, but that’s just not how personal finance works.

pay off debt or save money

Every situation is different, and today, I’d like to go over different circumstances so you can figure out the best answer for your personal situation.

Whether you have a mortgage, student loans, a car loan, credit card debt, medical loans, or something else, you may be wondering if you should only focus on paying off your debt and how saving money fits in as well.

And, you may be stuck.

A big question when paying off debt is if that should be your sole focus. Should you still be trying to save money while paying off your debt?

Or, should all of the extra money you have be going towards your debt?

You may be wondering things such as:

  • Should I pay off debt or emergency fund first, as in set some money aside for emergencies?
  • Should I pay off debt or save up for a downpayment?
  • Should I pay off debt or save during a recession?
  • Can I pay off debt AND save money at the same time?

And so on and so on.

Paying off your debt is a great thing to think about.

However, where does saving money come in when it comes to your overall financial plan? 

This becomes the really tough decision – should you pay off debt or save money? Is It better to pay off debt or save? Should you do both at the same time? 

I am asked these questions all the time because people realize that both are very important personal finance decisions. But, everyone is going to have to make the best choice for themselves.

If you’ve read How I Paid Off $40,000 In Student Loans in 7 Months, then you know that I paid off my student loans quite quickly. In order to do this, I had to decide whether to focus on my student loans and pay off debt, or invest in my long term savings plan.

It was an incredibly tough decision to make, but I made paying off my debt my sole focus.

Deciding to pay off my debt while putting $0 towards my savings did not sit well with about 50% of my readers.

But, that’s personal finance – it’s personal!

Just because I made this choice doesn’t mean that it’s the only choice. In fact, I think that saving some would have been an equally good decision (maybe even better).

If you are asking yourself whether to pay off debt or save money, I can’t give you a definitive answer because everyone’s situation is so different. 

However, I am going to go over some common questions about this topic to help you make the smartest decision for your situation.

Content related to paying off debt or saving money:

Should you pay off debt or save money?


Are you paying the minimum payment on your debt?

In pretty much every situation, you should always pay at least the minimum balance on your debt.

So many people do not really understand what a minimum payment is, so before I talk any more about deciding to pay off debt or save money, I want to talk about this.

Here’s a basic breakdown of what minimum payments are:

  • Minimum payments are basically the smallest amount your lender will let you pay each month.
  • Making only the minimum payment leads to paying more in the long run because of interest charges.
  • While minimum payments may keep you in good standing, they can affect your overall credit score.

You should always try to pay more than the minimum payment, even as you decide to pay off debt or save money. If you do not, you will have to pay interest charges, which may inflate your credit card debt significantly each month.

Related: How Do Credit Cards Work? I Answer The Most Important Questions


Should you pay off debt or save money during a recession?

In today’s current environment, this is an important and popular topic to talk about.

While I think that you should make sure you are paying the minimum payments on your debt each month, you also want to think about the future. If you are putting a lot of money towards your debt each month but have the possibility of losing your job, then you may want to build up your emergency savings as much as you can.

If you have a stable and secure job that you don’t think would be impacted by a recession (it’s very hard to be certain about this), then you may decide to continue to pay off your debt as quickly as possible.

I have heard many people say that 2020 has taught them the importance of having a larger emergency fund. Their experiences are helping them decide whether or not to pay off debt or save money, and many are choosing to save.


Do you have an emergency fund? Should you have an emergency fund if you are in debt?

So many people wonder if they should have an emergency fund or pay off debt.

I am a big fan of emergency funds, and I think most people should have one even if they are paying off debt.

In fact, I had an emergency fund while I was paying off my debt.

Now, I know that some of you may want to fight me over this, but I had an emergency fund because you never know when something unexpected will happen. It’s just that simple.

I recommend having an emergency fund of at least $1,000 while you’re paying off debt – it doesn’t need to be the full six months (or whatever number) of expenses. $1,000 is still a small cushion to help you in case of an emergency.

After that amount, you need to determine what you are comfortable with.

Having an emergency fund protects you from taking on more debt, and it will help you continue making your debt payments if something happens.

What if you had a medical emergency, immediate home or car repair, and more?

Having $1,000 in your emergency fund versus $0 can make all the difference if something comes up. You will be less likely to add to your debt if you have money set aside specifically for emergency expenses.

Without an emergency fund, you may add to your debt, and it will possibly be at a higher interest rate because you may have to use a credit card. This can turn into a disastrous situation. 

You have been working so hard to get out of debt, and an emergency fund can help you stay on track.

Also, even if you can only manage $100 to $500 right now, that is better than nothing. It may not cover the entire cost of your emergency, but it will help you a little bit. 

Note: On top of an emergency fund, I also recommend having an emergency binder. I recommend checking out the In Case of Emergency Binder to help you with creating your own emergency binder. This is a 100+ page fillable PDF workbook. There are 14 sections that go over key personal documents, household information, medical information, insurance policies, and more.


Should you use your credit card as an emergency fund?

You may be thinking “Well, I can just pay off my debt and not save for an emergency fund, and if something comes up, I’ll just use my credit card.”

Before you do this, I want you to fully think about it.

There’s a growing number of people who are looking to their credit card as their emergency fund. Some are doing it by choice, and others are forced to use their credit card when an emergency comes up because they do not have enough money saved.

This is something that scares me. While credit cards may work for some, I believe that a more traditional emergency savings fund is a better solution for the average person.

If your situation is quite risky, then using a credit card for your emergency fund may be a bad idea. This is because there is a greater chance of racking up credit card debt and being unable to pay it off whenever an emergency arises.

You are taking on a lot of risk if you are relying entirely on a credit card emergency fund.

You never know if something may come up, how big the expense may be, and whether or not you will have a large enough credit limit to fund the expense.

Plus, the interest rate on your credit card may hover somewhere near 20% or more, which makes for an expensive bill if you are unable to pay your credit card balance before interest accrues.

There are situations where using a credit card for your emergency savings fund may not be a completely bad idea. If you know that you can pay off a large expense within one month, then using your credit card as an emergency fund may not be a bad idea, but you still need to be careful before adding any debt.

See, the problem with this thinking is what happens if you lose your job? Many people have emergency funds so that they can support themselves if they were to lose their job. What would happen if you relied on credit cards but lost your main source of income?

This could lead to a lot of credit card debt.

My problem with using credit cards as your sole source for an emergency fund is that, in some situations, it may lead to more debt. Sure, some people can use their credit cards to their advantage, but the average person most likely needs a real emergency fund that they can count on.

My point here is to be honest with yourself so that you can prevent yourself from adding any debt and being in an even worse situation.


How fast do you want to get rid of your debt?

How quickly you want to pay off your debt will play a big role in your decision to pay off debt or save money. People who want to quickly get rid of their debt will most likely want it to be their sole focus.

Here’s what I did when I decided to pay off my $40,000 student loan debt in 7 months:

  1. I saved up a few months of expenses in an emergency fund. Since my student loans were at a 0% interest rate while I was in school, I saved money in an emergency fund just in case I needed it.
  2. Once my student loans came due, I decided to knock them out as quickly as I could.
  3. I then started putting 100% of what I could towards debt. Towards the end, I used a portion of my emergency fund to pay off my student loan debt.

Like I keep saying, my decision isn’t perfect for everyone. This is simply what I did.

I chose this option because I wanted my student loans to be completely gone as quickly as possible.

That huge monthly payment felt like such a big weight hanging over my head, and I wanted to stop worrying about it.

If you hate debt as much as I hated my student loans, then this may be the option for you as well.

Some people, like myself, get stressed out by debt, or certain types of debt, which can impact other areas of their lives. 

If having debt is leading to extra stress, which can lead to health issues, impact your relationships, work, etc., then focusing as much energy as possible on debt repayment might be the best option for you.

Eliminating means you are then free to focus on other areas of your financial situation, such as saving money for your future. 

Solely deciding to pay off debt or save money is almost like choosing to single-task versus multitask. You put all of your energy into one thing so you can focus on doing it efficiently and well, and once you are finished with that, you can put all of your energy into your next goal.


What’s the interest rate on your debt?

Now, there’s a chance that you may not really mind debt. Debt doesn’t have to be the end of the world, and many people are able to use debt to their advantage.

That might sound crazy, but it can be done!

If you have a low interest rate, then this may be something that you are thinking about – saving more money instead of throwing everything towards your debt.

I still remember my finance and economics professor in college talking to me about his student loans. He wasn’t worried about paying them off quickly because the interest rates were 2% or less. Instead, he put as much money towards investing because he figured he could beat his interest rate by investing in the stock market and in other areas of his life.

However, if your interest rate is high, then you may want to quickly pay off your debt.

For example, credit cards often have interest rates around 20%. There are also high interest rate student loans (like private student loans), high interest rate car loans, crazy expensive leases (such as on furniture), and more. 

These are the types of debt that you will really want to focus on because as that interest adds up, you ended up paying exponentially more in the long run.

The higher the interest rate, the more you should think about quickly paying off those debts. Interest on those debts is just going to keep piling up until it just seems so unmanageable, and this can make your long term savings and investing goals seem impossible to reach.

My personal thought on whether to pay off debt or save money in this situation is that if your interest rate is around 6-8% or higher, then you may want to think about paying off that debt a little quicker so that the interest charges don’t build up too much.


Do you get a company match on your retirement savings?

If your company provides a 401(k) match, then this is a benefit that you will most likely want to accept as you decide to pay off debt or save money and invest for retirement. 

If your company matches your 401(k) contribution, they are giving you money, for free. Even if you add a little in, you can still take advantage of their contribution.

If you don’t take it, then you are leaving a valuable benefit on the table, one that you have earned by working. It’s not like you would just let the company keep a paycheck of yours, and you can treat a company match similarly!


Should I pay off debt or save for a house deposit?

Because mortgage interest rates are so low right now, I’ve been hearing a lot of people talk about wanting to take advantage of those low rates and buy a house. For many, this means they will have to decide if they want to pay off debt or save money for a down payment.

The amount of money you have for a downpayment means you can take out a smaller loan and get a better interest rate, but having too much debt means you might not get the loan in the first place. And, because debt can negatively affect your credit score, you may end up with a higher mortgage rate.

You may want to play around with a mortgage interest rate calculator (there are lots of free ones online) and see how what you pay over the course of your mortgage will change with different interest rates and down payment amounts. 

Then, you will have to think about the kind of debt you have. Remember, high interest rate debt can cost you much more in the long run if you are only paying the minimum amount due each month.

Determining if you should pay off debt or save for house isn’t something you should take lightly, and there are lots of factors to consider, especially if you already have a lot of debt.


Should you pay off a mortgage quickly or not?

Recently, I had a great guest post here on Making Sense of Cents about a reader who was wondering if they should pay off their mortgage quickly or not. They were wondering if they should use savings to pay off debt.

You can read the full article here: Should we pay off our mortgage quickly or not?

I wanted to share their thought process in this article, though, as it is so relatable and applicable.

Here’s a quick summary of their pros and cons.

Pros to paying off a mortgage quickly:

  • They’d free up cash flow that would otherwise be used to make a mortgage payment each month.
  • They’d be debt free. For life. From all debts. Forever.
  • It feels good. They’d achieve peace if they paid off the mortgage ahead of time, especially before retirement.
  • They’d have the mortgage paid off before their kids headed off to college.
  • The interest they’d save! They would save thousands upon thousands of dollars in interest if they worked diligently to pay it off.

Cons to paying off a mortgage quickly:

  • Lots of cash would be tied up in the house – a non-liquid asset.
  • Their interest rate is low – and the annualized return for the S&P 500 is roughly 10% over the last 90 years. They’d be missing out on higher returns if all of their efforts were put into paying off their house.
  • They’d no longer be eligible for a mortgage interest tax deduction.

 As you can tell, there is a lot to think about!


Do you have a pros and cons list?

The last question leads to the next thing that I think is important when deciding to pay off debt or save money – make a pros and cons list for why you may want to solely focus on paying off debt and what it means for YOU.

Remember, everyone’s pros and cons list will be personal, so I recommend sitting down, grabbing a pen and paper, and actually writing it out.

This will make it feel much more real, and you’ll be able to get your thoughts out and on paper.


How to pay off debt and save money at the same time.

Deciding only to pay off debt or save money doesn’t have to be the only option – you can do both at the same time.

It may take more work, but it can be well worth it to pay off debt and save money at the same time.

Here are some ways to both pay off debt and save money at the same time:

  • Make a budget.
  • Use your tax refund. If you receive a tax refund, you may want to split this between your debt as well as save some of it.
  • Set aside a certain amount out of each paycheck. You can set aside a certain amount of each paycheck to put towards your debt, and a separate amount for your savings.
  • Find ways to make extra money – Here are over 100 different ways to make extra money
  • Start a savings challenge – The $20 Savings Challenge is a great way to easily save $1,040 this year without noticing! All you have to do is save $20 each week for a year, and then you’ll easily have $1,040. If you start this now and do it just until the holidays, you will have a nice chunk of change as well! You can get the free printable here.
  • Use a micro-savings app like Qapital – You can set triggers for saving, like when you post a status update to Facebook, when the space station flies over your house, etc. You can also set automatic deposits, do round-ups, and more.
  • Cut your expenses and split the difference between paying off debt and savings.
  • Pay yourself first.

And the list goes on and on!

Again, deciding to pay off debt or save money isn’t your only option!


Don’t be too hard on yourself.

While I realize that choosing to pay off debt or save money can be an incredibly hard decision to make, you should remember that both are good things to focus on.

Both deciding to pay off debt or save money will bring you closer to achieving your financial goals, and the fact that you are doing one or the other means you are making a positive decision for your future.

This is really important when deciding which to focus on – both choices are good. 

If you are just absolutely stuck and still asking, “Should I save or pay off debt?” then you may want to put half towards your debt and half towards your investments, so that you can move on with life and spend more time improving your finances in other areas.

Also, remember that you can always change your decision and do something different later! If you find that something isn’t working, you can make changes.

Lastly, remember that personal finance is personal. What may have been a great decision for one person doesn’t mean it will always be the best choice for you. You will want to weigh your options and see what is best for your specific situation.

What would be your choice? Should you pay off debt or save money? A healthy balance of the two?

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Michelle Schroeder-Gardner

Author: Michelle Schroeder-Gardner

Hey! I’m Michelle Schroeder-Gardner and I am the founder of Making Sense of Cents. I’m passionate about all things personal finance, side hustles, making extra money, and online businesses. I have been featured in major publications such as Forbes, CNBC, Time, and Business Insider. Learn more here.

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  1. Hey Michelle, I agree with you! Personal finance is…personal. It is definitely difficult to know what is best for each person. You bought up some excellent points here that will help so many. For us, we wanted to get away from our debt as soon as possible. I paid off my student loans the first year after college because they felt heavy on my shoulders. After my husband and I bought our first house, we paid it off in 13 months. We were 25 and we’ve been debt-free and mortgage-free since. Making a budget and sticking to it is what helped us achieve that dream!
    Thanks for the great article!

    1. Congrats on being debt and mortgage-free! What an amazing accomplishment at such a young age. I bet it feels great to have that weight off your shoulders. Cheers!

  2. Debby Erdmann

    Paying off debt is always better then you have so much more to save.

  3. We are choosing to payoff debt right now and not saving much. We have a small emergency fund but not contributing to this while we pay debt. We want the peace of not owing anything to anyone.

  4. Paying debt can not only be mentally rewarding, but also a spiritual journey to financial freedom. I am incredibly impressed by your devotion to eliminating debt! What peace that must be.