Managing your financial life is not just about money.

Savings vs Paying Debt

By Alyssa McNamara Reed, CFP®

I often get the question “what’s more important- paying down debt or saving?” The answer is, of course, different for everyone, but here is some generic advice.

If you have high interest rate debt (by that I mostly mean credit card debt), absolutely pay that off before you start saving. Paying 20% interest on a debt (that is not tax-deductible to boot) is an enormous waste of money. I suppose it goes without saying, but once you’re past that debt, don’t rely on cards again unless you can pay them off immediately. The caveat to this is that if you have a 401(k) (or the like) through an employer, and IF that employer provides a matching contribution, then you should at least contribute the minimum to the 401(k) to receive the full match. An employer match is like free money, and you should never pass that up, unless your circumstances are dire.

If you have low-ish interest rate debt like student loans, paying those down versus saving is a difficult decision, but I lean towards debt reduction as the more important of the two. Having debt can be a huge emotional weight on your shoulders, and most people just feel better when it’s gone. I generally favor paying down this sort of debt with most dollars (perhaps using smaller dollars to save) then using all dollars to save once the debt is eliminated.  This takes discipline though, as once the debt is gone, people may be inclined to spend the saved dollars in lieu of investing them.

If your mortgage is your only debt, then my answer depends on how old you are and how long you plan to live in the house. If you are young and/or you plan to move in the foreseeable future, then focus on saving because real estate situations can change. Also interest rates are low, and the interest on this debt (in most situations) is tax-deductible, both of which strengthen the argument for saving. If you are within say 10 years of retirement and the mortgage is your only debt, then I may favor reducing the mortgage over saving. But again, it is a balancing act, and likely I would recommend both in some weighting.

There may be times when your projected earnings on invested dollars is higher than the interest rate on the debt. So while the basic math in that situation supports saving versus paying down debt, I go back to my point about debt being an emotional weight. Don’t forget, financial markets can change, and so can income and work situations.   You don’t want to have a lot of debt if you suddenly become unemployed because you may be in a situation where you can’t pay the debt, the debt compounds, and your situation gets worse. Foregoing a period of time of saving while being unemployed is less of scary situation. Sometimes it’s more complicated that just doing the basic math.


Please contact your professional for tailored advice.

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