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Should you Save, Pay Down Debt, or a Little of Both?

I am asked this question a lot! And like everything in financial planning, it depends. Well, kind of. I do have some pretty strong opinions about certain forms of savings and debt and I will highlight those in this month’s blog, as well as help you prioritize the best way to save and pay down that pesky debt.

But first, you need to figure out what is coming in (income) and what is going out (expenses). Sound familiar? This is a basic cash flow exercise. While you may have some control over what is coming in, you probably have more control over what is going out, particularly those non-discretionary (or unnecessary) expenses. These include dining out, entertainment, travel, shopping, and other fun stuff. What can you cut back or eliminate? To be clear, I am not asking you to take fun away! But, if you are struggling with the question I am posing, you will need to take a good look at what is available to tackle savings and debt. My budget blog can help ease some of your fears.

Once you have a grasp on what is leftover, we can discuss what to prioritize. Keep in mind, you may not be able to do everything at once, and that is okay. The key is to start.

1. High Interest Debt

If you are paying credit card interest and fees each month, this should be the first place you put extra money. But, you have to pay more than the minimum balance to make any real progress. If you are in over your head, I suggest looking at 0% balance transfers to another credit card or consolidating the debt into a personal loan.

With credit card rates averaging close to 20%, it makes no sense to continue to carry this burden around. By the way, this will only work if you stop using your credit cards entirely. If you have no credit card debt, any interest rate above 6% could be considered high.

2. Emergency Savings

If you don’t have at least the start of an emergency account that is easily accessible in the event of a major expense or job loss, it’s time to get rolling. Over the past couple of years, the pandemic, inflation, and job losses have made our lives uneasy, and those who couldn’t cover a few hundred dollar medical expense or even worse, lost a job without any backup income, learned that setting money aside for unexpected events is not only smart, but necessary.

Online savings accounts offer the best interest rates compared to brick-and-mortar banks. A money market account could also work, but I do not suggest a CD because they have penalties for early withdrawals. Also, investments such as stocks, bonds, and mutual funds fluctuate in value.

Remember, a savings account is not an investment. It is money you know will be there if you need it. Ideally, 3-6 months of expenses is a good target. Some experts say more, but if you are starting from nothing or have very little, getting started will be a big accomplishment!

3. Employer Match

I struggle making this #3, because if an employer is willing to match you dollar for dollar if you contribute up to a certain amount to their retirement plan, you need to do it no matter what. It’s free money. This is a no brainer. Moving on…

4. Other Stuff

If you paid off all high interest debt, have 3-6 months in a savings account and are contributing up to the employer match, congratulations, you now have lots of options! Auto loans, student loans, IRA’s, HSA’s (health savings accounts), brokerage accounts, and more are on the table!

Prioritizing these is a little more complicated and depend on a lot of factors, including what is available to you. For example, not every employer offers an HSA, and not everyone can contribute to a Roth IRA due to income limits. This is where defining a clear set of goals will help. For example, is retiring at age 55 a priority over paying off both cars? Would you feel better having no mortgage in 20 years or ensuring you are able to pay for medical expenses in retirement? Maybe you would like to save for a vacation every year and invest for a new home in 10 years?

These are great exercises to ensure you aren’t just throwing darts with a blindfold on. Being clear on your goals and priorities will give you peace of mind and some direction.


The goal here is to help you prioritize where money should go if you have both debt and want to save. The first step though is to do a full review of your income and expenses. If you have little money leftover, you may only be able to focus on one thing. If you find more, perhaps you can tackle 2-3 at the same time. A simple example is if you are behind on saving for retirement, there is no reason not to take advantage of the employer match while you are also tackling credit card debt.

A good rule of thumb is to save 10-20% towards savings and retirement. But, as long as you are holding onto debt, you are paying someone else and getting nothing in return. I have even heard the phrase, “you are robbing your future self.” Whatever resonates with you, use that to get started and have a plan in place. Once debt is paid, there is more money for savings (and for YOU!). If you need help getting started, a financial planner professional can help. Good luck!

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