Savings-v-Debt

Saving vs. Paying Off Debt - Which Should You Do First?

When it comes to personal finances, one of the most common questions people face is: Should I focus on saving or paying off debt? The answer depends on your unique situation, but there is a clear starting point that applies to everyone...

Build a Solid Emergency Fund First!

Before throwing extra money at debt, make sure you have 3–6 months’ worth of essential expenses set aside in a dedicated emergency savings account. This is your safety net for unexpected life events like job loss, medical bills, or car repairs.

Why is this step so important?

Imagine putting all your extra income toward paying off credit cards, only to get laid off a few weeks later. Without an emergency fund, you could end up right back in debt—this time with fewer options. Having savings in place protects your financial progress and gives you peace of mind.

How much should you save? It depends on how quickly you believe you could find new work. If you’re in a high-demand profession, three months might be enough. If your role is more specialized or less stable, aim for six months or more.

Also, consider that a regular bank savings account does nothing for your money with such low interest rates. Choosing a high-yield savings account will allow your money to get to work for you!

Next: Tackle Bad Debt

Once your emergency fund is fully established, it’s time to eliminate bad debt—typically high-interest, non-deductible consumer debt like credit cards, payday loans, and unsecured personal loans.

For example, if you’re paying 20% interest on a credit card while your savings are earning just 4%, that debt is dragging you down fast. The math is clear: pay it off as quickly as you can.

Then: Evaluate Cost vs. Return

With your emergency fund secured and bad debt behind you, the next step is more nuanced. Now it becomes a matter of comparing your cost of debt vs. the return on your savings or investments.

This is sometimes called assessing your net blended interest impact—a fancy way of asking: Is your money costing you more than it’s earning? If you have a car loan at 7% and your investment account is growing at 5%, it might make sense to pay the loan off faster. But if your student loan is at 3% and your high-yield savings earns 4.5%, keeping the loan and investing the extra could be the better option.

 Also remember, not all decisions are purely mathematical. For many, paying off debt creates a sense of freedom that’s worth the trade-off, even if the numbers say otherwise.

Choosing the most efficient path forward is where a financial advisor can come in very handy. They can help you weigh your options, prioritize your goals, and create a plan tailored to your life.