There is a lot of debate surrounding the topic of whether it is better to save money or pay off your debt. This is a complicated question with no easy answer. It depends on a variety of factors, including your income, expenses, interest rates, and debts.

One thing is for sure: you should not neglect either savings or debt repayment. It is important to have a healthy balance of both. Ask yourself these 7 questions to help you make the best decision when it comes to saving money vs. paying off debt.

Does My Emergency Fund Help Me Save Money?

Saving money in an emergency fund will help reduce your stress level as you are trying to pay off debt at the same time. Saving a little may be the best place to start before you focus solely on paying off debt. Having a minimum of $1,000 in your emergency fund is essential. Think about all the unexpected expenses that might pop up, car repair, roof leak, hot water tank, emergency room visit, etc. those are not small emergencies and could use half or all of that $1000 all at once. However, could you imagine if you didn’t have any money saved?

The purpose of the emergency fund is that you have money for those last-minute repairs or unexpected bills. This way you don't have to use a credit card to cover them. If, however, your emergency fund is being used for things that are NOT emergencies- then it isn't helping you save money or pay off debt. Make sure it is serving you and your goals.

If you are feeling ambitious, and want to completely remove your money stress, then save three months’ worth of expenses. Having a few months saved will truly cover you in the event there is a job loss or illness. That safety net will give you time to find another source of income without having to go further in debt.  

How Does Your Income Security Affect Your Ability to Pay Off Debt?

Can the company you work for withstand a global pandemic? Are you a contractor who can be let go at any time? Do you work for a government or state entity that will be a more secure employer versus a local business?

 If you have a more stable source of income, you might choose to focus more heavily on reducing your debt than saving. Of course, there is always a “but” situation. We all saw the government shut down in 2019 that left thousands of federal employees without pay for weeks. The families with emergency savings weren’t affected as much as the families without one. Eventually, those employees were paid for the days out of work while the government decided on a budget, but during that time many were left with no financial support.

·Having a temporary position will fall under the insecure or unstable source of income. Once your contract is over, the company does not have to extend or renew it. If you have been focusing on your debt, an unexpected job loss this could really turn your finances upside down. This is a great example of when saving money versus paying debt may be best.

 What Rate of Return Will I Receive on My Investments?

The question you should ask yourself is: “If I saved and invested for 10 years, will the money generated be greater than what’s being paid off?” You want your money to work for you. Investments are a great way to start saving while still paying off debt, but only pursue this if you also have a fully funded emergency account.

What is the Interest Rate on My Debt vs. Investments?

Your credit card interest rate might be 19% or more. Unless you’re a millionaire and have access to investments that regularly give you more than 19%, focus on your debt until it is gone. Paying on your high-interest debt is like earning that same percentage return in investments. If your emergency fund is set, but you have high interest debt, then focus on the debt and hold off on saving as much. Your debt with an interest rate higher than your investment return is a contender for any disposable/extra money.

One way to save money while paying off debt is to use a balance transfer. If your credit card debt has an astronomical interest rate, transfer it to a lower rate. You will have to pay a fee, so do the math to see if this is the best choice for you.

What is the Interest Rate on My Saving Account?

Many people are not ready to invest, or are not sure how to start investing, so they are primarily leaving their money in a savings account. If that’s you, cool. Look at the amount of interest your bank or credit union is offering you each month on the money sitting in your savings account. My guess is it’s less than 1%. That money can be better used paying off high interest debt. Remember this is money after you have built your emergency fund, whether you decided on $1,000, $3,000 or three months.

Are Your Financial Goals Clear When Deciding Between Investing and Debt Payments?

Are you close to retirement, and have more than enough money put away? Then it’s debt time!!!  Paying off debt before you retire will free up more money monthly. It will help your retirement funds go further. However, if you have a child going off to college, or will need a car the following year, then saving may be the best option.

Even though we're not really talking about investing here, it can truly accelerate your financial goals even if you start a little at a time. Some apps you can start using to invest with small amounts of money are Public, and Webull. Here’s some of my links that will give us both some free stocks and credits when you sign up.

 Ask yourself, “what financials goals do I have, and does it make more sense to save or pay off debt”?

Is Saving Money or Being Debt Free More Important to Me?

You may have different priorities when it comes to money. Some of us are more concerned with having enough cash on hand so that we don't ever need a loan from our banks or friends. Others would rather be debt-free.

The emotions surrounding these financial decisions can play an important role and should not be ignored.

If having no debt gives you a peace of mind, then focus on that! Going against what feels good to you will have you questioning your decision and eventually stop you from making any progress.

Paying down debt and saving are both worthwhile options for your money. Whether you choose one over the other will depend on what is best suited to meet your individual needs.. If all else fails there's no shame at getting creative! Put a little into savings and a little on debt, but be sure to have a plan for what you are doing. Overall, ask yourself – Where Will My Money Have the Biggest Impact?

Grand vision, small focus. Write down your savings goal and debt pay off goal. Don’t forget to add a little investing in your plan to help speed up the process because then you’ll have more money to grow your savings and pay off debt.

If you're still unsure of your next financial steps, schedule your Financial Wellness Call for support. I can help you get moving towards your financial goals.