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Debt or Savings: Which Do I Contribute to First?

May 17, 2021
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For most of us, needing to pay off debts and save money simultaneously is a fact of life. Whether you are paying down medical school loans, chipping away at a large purchase, or contributing to your mortgage, these recurring expenses can feel like they’re dominating your budget and leaving little room for savings in the process.

That being said, it is also important to establish and build up your savings, which can actually help you avoid incurring more debt in the future. Not only is having an emergency fund a great way to gain peace of mind, but it can also keep you above water in case the unexpected happens—for instance, if you have more than $250 in savings, you are far less likely to miss a housing payment. Maintaining an equilibrium between paying debt and building savings is a delicate process, but by assessing your priorities, you can better determine where to focus your finances.

Should I Pay Down Debt or Build Up My Savings?

When discussing debt and savings, it is easy to think in terms of all or nothing—but rest assured, there is another way! Instead of only putting your money in one place or the other, you can instead determine your priorities and allocate your funds accordingly.

Priority One: Building Up an Emergency Fund

If you are in a scenario where you are starting with zero savings and a significant amount of debt, establishing a strong financial foundation should be priority number one. It is recommended that you have at least six months of income saved as an emergency fund at the bare minimum, which can be a great way to stave off future debt for life’s unexpected happenings. If you’re starting out in this scenario, prioritize building up your emergency fund while still paying at least the minimums on monthly debt payments until you build yourself a comfortable cushion.

Priority Two: Paying Off High Interest Debt 

If you have debt that is particularly insidious, such as credit card debt or other balances that carry extremely high interest rates, tackle these next. This way you are able to break the debt cycle and reclaim more of your money each month, as it won’t be going to exorbitant interest payments.

Priority Three: Finding a Sustainable Balance

Once you’ve started your savings and eradicated particularly bad types of debt, you can establish a sustainable balance between the two that will carry you into the future. Paying off low-interest loans, such as mortgages or car payments, can be done over a longer period so you are able to allocate to your short- and long-term savings plans and reach all of your financial goals.

If you aren’t sure how to allocate your money, we’re here to help! Get in touch to learn more about our financial planning services today.