Should You Pay Off Debt Or Save?

A question I get often is “Should I focus on saving or paying off my debts?” Well, in short, both!

The unfortunate fact about debt is the longer you put it off, the more it costs you. So, while saving is absolutely important, you’ll never “finish” saving. Saving is a lifelong commitment (though your savings goals and contributions will vary over time), so waiting for a time where you’ve “saved enough” to start paying debt will never really happen and you’ll only find yourself with more debt to pay than you initially had. So where does that leave you?

When it comes to saving, it can often feel like it’s never enough.

I generally recommend focusing on paying high interest debts first, although some people prefer starting off paying some smaller debts in full to wipe them off the table and give them the mental confidence they need to tackle the rest of their debt.

When making a debt repayment plan, gather together all documents relating to your various debts and take into consideration the amounts owed, the interest rates, and any other important factors to consider, such as whether your student loans are eligible for loan forgiveness. As mentioned, it is generally a good idea to focus on paying down high interest debt first, as this will save you money in the long run. Assess your monthly budget and look for areas where you can cut back so you can reallocate this money towards paying more than the minimum on the debt you are focused on. Paying off debt can be a long, slow process, so patience is key. Just stay focused on the fact that paying more than the minimum will help to get it off your plate sooner and save you money in accrued interest.

When it comes to saving, it can often feel like it’s never enough. After all, most of us are saving for many different things: retirement, an emergency fund, a down payment on a house. And if you have many forms of debt (as many people do), such as student loans, a financed car, and credit card debt, there’s a good chance these payments eat up a large chunk of your budget, leaving little left to save. The important thing to remember is saving just a little bit is still better than nothing, especially if put into a high-interest savings account. So start small if you have to and as you eliminate certain debts, you can continuously up your savings contributions. Treat your savings as a mandatory expense, not an optional one, by including a predetermined amount in your budget and transferring the money at the beginning of the month, before you have a chance to miss it or be tempted to spend elsewhere. Waiting until the end of the month to “see what’s leftover” will more often than not leave you with next to nothing to put away.

Another important thing to consider when making a plan to tackle debt and save is to make use of cash windfalls such as your tax refund or a gift. Rather than treating this money as extra spending money, put it towards debt or savings instead – this will be a bigger gift to yourself than a vacation or new wardrobe.

Saving and debt will always be a part of life and it will feel like both are screaming for more attention from you.

By factoring in savings and a plan to tackle your debt into your budget, you can ensure you stay focused on your goals and be able to watch your debts dwindle and your savings grow.