How to know when to save and when to pay debt

We are all juggling a number of financial priorities, and sometimes they can be in conflict with each other. Most good financial advice includes recommendations for how to save money, but saving can be hard when you have loans or other debt that needs to be paid. How do you know when saving or paying off debt is best for your financial future?

The question is a bit tricky, because your individual financial situation is unique and what’s best for one isn’t for another. Start by considering your emergency fund. An emergency fund can help you cover unexpected expenses when they arise, and buffer your income in case something happens to your job or health. Without it, you may have to turn to a credit card when problems arise—which could result in even more debt. If you don’t have any money saved for emergencies like health issues, car problems or job loss, you may want to build your savings first and then work more to pay off your debt. Plan to save some money little by little, aiming for roughly three months of your current income.

If your retirement fund is most important to you, you may want to prioritize those savings as well. If a 401k account is made available through your employer, think about maxing out your contributions to that. Thanks to compound interest and other potential tax incentives, the benefits of starting early on this investment can make a big difference in the long run. Plus, if your employer matches your contribution, that’s free money for you.

Ideally, we all would prioritize our savings all the time, but debt is a reality that sometimes requires immediate attention. Medical debt, credit card debt and student loan debt are all examples of financial stressors that can impact or delay major life milestones. Sometimes they take priority over long-term savings goals. If you find your debt getting in the way of major life goals like going to school, getting married or having kids, make a plan to eliminate that debt so that you can dedicate more of your expendable income to long-term savings.

The average interest rate across all credit cards at the beginning of 2019 was 15.09%, so if you have a particularly high interest rate it may also benefit you to pay this off before focusing on savings. Try to pay more than the minimum each month, and don’t forget about the option of consolidating your loans to help you save. High interest rates are expensive and draining, and the interest you would receive on a typical savings account isn’t usually enough to overcome that.

There are benefits to prioritizing both savings and paying down debt, and ultimately you want to make room for both. But your own financial situation isn’t one-size-fits-all. First Tech can help you make a plan that fits your life.