Should I Pay Down Debt or Save Money?

Should I Pay Down Debt or Save Money?

If it seems like your paycheck isn’t going as far as it used to, welcome to the club. A survey conducted by the CFP Board in the fourth quarter of 2024 found that nearly nine in 10 Americans feel they lack sufficient resources to fully address all their financial obligations and priorities. That has a lot of people asking whether they would put themselves in a better financial position by paying down their debt or by saving money.

Many opt to reduce their accumulated debt — from credit card purchases, student loans, housing and medical expenses, etc. Others are focused on saving — for a car, home, vacation, retirement or other goal. From a practical standpoint, both these approaches hold merit; the ultimate path forward depends on personal circumstances and preferences. As you choose your own path, thoughtfully consider your priorities and budget. Looking a little more deeply into your personal situation may help you determine your best step forward.

What to consider

Following are some considerations to keep in mind as you assess how much to allocate to reducing debt and how much to save.

How much do you have to work with? First, make sure you have a good grasp of your financial situation. How much income do you have coming in from all sources? How much of that goes to your mortgage or rent, groceries, utilities, bills and other household expenses? How much discretionary money can you put toward reducing your debt or increasing your saving? If you don’t have one yet, this is a good time to create a monthly budget for yourself or your household so you have a clear view of your finances.

Do you have a robust emergency fund? Building an emergency fund with enough money to cover three to six months of living expenses in the event of a job loss or other financial hardship should be a priority for everyone. Having available cash means not having to go into debt over unexpected expenses — car repairs, medical bills or necessary home improvements, for example — and offers peace of mind that if something should come up, you’re financially prepared.

Interestingly, a January 2025 U.S. News survey found that 42% of Americans don’t have an emergency fund. Almost as many — 40% — said they wouldn’t be able to cover a $1,000 emergency expense with cash or savings. This lack of savings can trigger anxiety and often causes people to turn to credit, which can cost them more in the long run, due to interest charges imposed on credit over time.

Does your employer offer a 401(k) match? If you are enrolled in a 401(k) that your employer supplements by matching your contributions to a certain percentage of your salary, you may want to prioritize making the most of that free money. For example, if contributions are matched up to 6% of your salary but you’re contributing only 5%, you are walking away from money that could help you grow your retirement savings faster. An employer match is a good argument for conscientiously saving more for your retirement.

What other savings goals are important to you? Depending on your lifestyle and stage of life, you may be saving for a car, a home, higher education, vacations or other goals. No matter what goals you’re striving to reach, a steady savings plan can empower you to get there.

Make sure you choose a savings account that compounds your interest earnings. Dollar Bank’s Smart Savings Account, for example, compounds interest in addition to offering a premium interest rate to boost savings for account holders who link their Smart Savings Account to their Everything Checking Account. In fact, Dollar Bank offers a variety of savings account and certificate of deposit (CD) options.

Once you decide how much of your monthly income you can allocate to savings, you can build that amount into your monthly budget to make sure you stay on track toward your goals. Consider automating your deposits so that you first tuck some money away before you’re tempted to spend it!

How much interest are you paying on your debt? As part of your financial review, be sure to make a list of all the debt you owe. Include creditor names, payment due dates, interest rates and outstanding balances. For each account, indicate whether you are making the minimum monthly payment or paying more toward the balance.

Then check the math to see how much you are committing to in interest payments if you continue paying at the rate you’re paying versus upping that payment to pay down the debt more quickly. Here’s an example scenario:

Credit card balance: $6,500
Annual percentage rate (APR): 21.59%
Minimum monthly payment: $130

If you were to make only the minimum payment each month, it would take 124 months — more than 10 years — to pay off the balance and would cost you about $9,540 in interest. Increasing the monthly payment by $250 would pay this debt off in about 21 months — less than two years — and cost $1,185 in interest. Putting that discretionary $250 toward the outstanding debt would save you about $8,355 and more than eight years of an outstanding balance.

If doing the math leads you to determine that you’d like to focus on paying down your debt, this article explains two methods for going about it, the debt avalanche method and debt snowball method. If you have debt from several creditors that you may want to consolidate into one monthly payment, our debt consolidation article may help.

Finding your balance

Now that you have thought about various factors that weigh into the decision of whether to lean more toward paying down debt or saving, you hopefully have a better idea of which feels right for your circumstances. If not, you could consider the option many people take, which is simply to take their discretionary funds and split them equally — save half and put the other half toward debt.

Whatever your decision, try to include both debt reduction and savings if at all possible. Paying even a little over the minimum payment each month can help you pay off debt faster, while avoiding some of the interest. On the other hand, if the anxiety and cost of debt lead you to conclude that you should focus entirely on paying it off, remember that it’s important to your financial stability to tuck at least a little into savings so you have cash to lean on in the event of a crisis or unexpected expenses.

Give yourself credit as you move forward, too: You are taking positive steps toward improving your financial position, and that’s always a good thing! And remember, you don’t have to go it alone! If you would like a second look at your finances, schedule an appointment for our free Financial Check-up. Our experts will provide a thorough analysis of your debt, help you make a plan to maximize your savings and find ways to eliminate fees.