The case for paying off debt 

Imagine debt as a hole you’re trying to climb out of. The deeper the hole (i.e., the more debt you have), the harder it is to get out. Here’s why tackling debt first can be a smart move: 

• Interest is working against you: Every day you carry high-interest debt, you’re essentially paying for the privilege of owing money. Credit card debt, with its sky-high interest rates, is especially brutal. It’s like trying to fill a bathtub while the drain is open – you’re losing money faster than you can save it. 

• Psychological freedom: There’s something incredibly liberating about becoming debt-free. The weight that lifts off your shoulders when you make that final payment? Priceless. This emotional boost can motivate you to make even better financial decisions going forward. 

• Improved credit score: Paying down debt, especially credit card debt, can give your credit score a  nice bump. A better credit score can lead to better interest rates on future loans, potentially saving you thousands. 

• More financial flexibility: Once you’re out of debt, you have more options. Want to switch careers? Start a business? Take a sabbatical? It’s a lot easier when you don’t have debt payments hanging over your head. 

The perks of saving 

Now, before you go throwing all your cash at your debts, let’s look at why saving might be the way to go: 

• Emergency fund is your financial safety net: Life has a funny way of throwing curveballs when you least expect them. An emergency fund can keep an unexpected expense from turning into a financial disaster. Without savings, you might end up racking up more debt when emergencies strike. 

• Compound interest is your friend: When you save (especially if you invest), your money can start making money. The earlier you start, the more time your money has to grow. It’s like planting a tree – the best time to start was 20 years ago, the second-best time is now. 

• Peace of mind: Knowing you have a financial cushion can reduce stress and help you sleep better at night. There’s real value in that peace of mind. 

• Opportunity fund: Savings aren’t just for emergencies. They can also be for time sensitive opportunities – like a great deal on a house, a chance to invest in a friend’s startup, or any other lucrative opportunities that pop up and can’t wait for you to pay off your debt. 

Factors to consider when deciding 

Your specific situation will influence whether you should lean more towards debt payoff or saving. Here are some things to think about: 

• Interest rates: Compare the interest rates on your debts to the potential returns on your savings. If your debt interest is higher, prioritize that. 

• Job security: If your job isn’t super stable, you might want to focus more on building up savings as a safety net. 

• Emotional factors: Some people just sleep better knowing they’re debt-free, while others feel more secure with a robust savings account. Your peace of mind matters. 

• Future goals: Are you planning to buy a house soon? Start a family? Your short and long-term goals should factor into your decision. 

• Types of debt: Not all debt is created equal. A low-interest mortgage is different from high-interest credit card debt. 

The balanced approach: why not both? 

Here’s where it gets interesting – in many cases, the best approach is actually a balance of both paying off debt and saving. Seems like a contradiction? Let’s break it down: 

• Build a mini emergency fund first: Start by saving up a small emergency fund – maybe $1,000 or one month’s expenses. This gives you a buffer so you’re not constantly dipping back into debt for every little surprise expense. 

• Tackle high-interest debt: Once you have that mini emergency fund, focus on paying off high-interest debt, especially credit cards. The interest you’re paying on these is likely way higher than what you’d earn on savings. 

• Take advantage of employer matches: If your employer offers a 401(k) match, try to contribute enough to get the full match. It’s essentially free money, and the long-term growth potential is hard to beat. 

• Build up that emergency fund: Once the high-interest debt is gone, bulk up your emergency fund to 3-6 months of expenses. 

• Balance long-term savings with lower-interest debt: At this point, you can start balancing paying off lower-interest debts (like student loans or a mortgage) with saving for long-term goals like retirement or a house down payment. 

The bottom line 

Here’s the deal – there’s no one-size-fits-all answer to whether you should pay off debt or save. In an ideal world, you’d do both. Start with a balanced approach, and then adjust based on your specific situation and goals. 

Remember, personal finance is a marathon, not a sprint. The most important thing is to start taking positive steps, whether that’s putting a little extra towards your debt each month or setting up automatic transfers to your savings account. 

Need a little guidance to move forward? Try the JGW 70-Day Financial Fitness Challenge to jumpstart your journey.