Should You Save or Pay Off Debt?

Consumers with debt often struggle between the decision to pay down the debts faster or put away money in savings. Like many financial decisions, it comes down to your personal situation and financial goals. For many consumers, a balance between paying off debt and saving money for the future is a suitable compromise.

Current Financial Situation

Your overall financial situation plays a role in deciding what to do with extra money. If you already have some money in savings, pay all of your bills on time and have responsible spending habits, paying down debt is likely a better option. This helps you get rid of the high-interest balances that ultimately cost you more money. Because of the relatively stable financial situation, that extra money applied toward debt won't be missed.

If you are living paycheck-to-paycheck, starting with a savings account gives you a buffer for future financial difficulties. Often called an emergency fund, putting away money gives you a resource when an unexpected expense occurs. Once you have a comfortable cushion in your savings account, you can focus on paying down the debt.

Goals

Take inventory of your financial goals for the future when determining if you should save or pay off debt. If paying off your debt is your top priority and you are stable financially, focus your extra money on your debts. If you are concerned about your retirement account not being sufficient, make those accounts your first goals. Consider where you want to be financially in the coming years to help you develop your goals and prioritize your money.

Balance

A balance between paying off debts and saving money allows you to address both issues. Set a goal for your savings account if you are trying to build a financial cushion. Calculate the amount of extra money you have in the budget each month. Apply a portion of that money to pay more than the minimum payment on your debts. Use the remaining extra money to fund your savings account, retirement accounts and other savings options.

Tips

Changes to your spending habits allow you to free up more money to go toward debt, savings or both. Stop charging excessive amounts on your card, especially for items you don't really need. By not charging more money, your balances are able to go down with the additional money you pay. Any extra money from things like bonuses and gifts gives you another opportunity to build your savings or pay down debt.