Paying Down Debt vs. Saving Money - Um, Which Should You Do First?

So many people have too much debt and too little savings, which makes the answer to this question kind of a no-brainer - pay down debt so that you can eventually save and only save, right? Actually, it’s not that cut-and-dry. If it’s going to take a good long time to pay off all that debt, shouldn’t you have a rainy day or, more importantly, an emergency fund in the meantime? On the other hand, if you have money in a savings account, that’s a nice chunk of change that could go towards paying down your debt, isn't it. Without guidance, this can become an endless cycle of questions, making it impossible to figure out the right answer.

What’s Your Debt’s Interest Rate?

The higher the interest, the more beneficial it is to pay the debt off as quickly as possible. That way, you’ll pay less over the long run. Instead of clumping all of your debt together, break it into “good” and “bad” debt based on both the repayment terms and the interest rate. Most of the time, credit card debt is going to belong in the “bad” category, since interest rates are notoriously high (10% and up, sometimes even soaring higher than 20%). On the other side is your mortgage, which is “good” debt - currently, rates are super low and you can deduct the interest you pay when tax season rolls around. The verdict? If you’re going to spend any amount of money paying off debt, start with the “bad” debt. Then, you can decide whether you want to save the rest of it or start tackling your “good” debt.

What Return Will You See On Your Savings?

Money that goes into a savings account and just sits there may feel like money wasted - and it might actually be a waste if you’re currently under water when it comes to your debt. However, it is important to have enough spare money set aside to get through an emergency so that you won’t have to rely solely on your credit card. The best way to start a savings account is to invest at least some of it - but only if the stock market is strong enough at the time. Otherwise, hold off on an investment until the market turns around, stash some money for an emergency and continue to work on paying back your “bad” debt.

Are There Incentives to Pay Off Your Debt or Save Your Extra Earnings?

Figure out what incentives are available to you regarding both paying off debt and putting money into a savings account. When it comes to debt, many lenders will offer a discount on the total balance if you pay off everything off earlier than expected. Not to mention that getting rid of debt can greatly improve your credit score, which means you’ll have an easier time qualifying for various types of financing. When it comes to a retirement account, many employers will match the contributions you make from your paycheck. You’ll also get a tax break when it comes to that 401K or other retirement savings plan.

A Final Word

If you’re going to pay off some of your debt, it doesn’t mean that you can’t save money at the same time, and vice versa. For many people, doing both simultaneously is the best recipe for financial freedom and a brighter future. In the end, the best choices are the ones that will make you more financially secure, not ones that won't move you ahead.

Emily Cross is a professional blogger that provides information and advice for car title loans, personal loans and business loans. She writes for Title Max, one of the top title pawn stores.