Save Money Or Pay Off Debt? (Here’s What We Did)

By Zach Buchenau

Last Updated: December 28, 2020

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Save Money Or Pay Off Debt? | Be The Budget

Are you wondering whether you should save money or pay off debt? Well, you aren’t alone. While some people lean toward the financial security and liquidity of a big savings account, others will encourage you to contribute the majority of your savings to pay off debt. And, while both sides have valid points, in our eyes, there is one clear winner. So, should you save money or pay off debt?

In general, it makes more sense to pay off debt than to save money; especially if the interest you are paying on your debt exceeds the interest you will earn in a savings account. On top of that, debt restricts your cash flow, which, in turn, hinders your ability to build wealth and achieve your long-term financial goals.

So, if you had to make the choice between one or the other, paying off debt is the better option.

That said, I also wouldn’t recommend you spend every last penny of savings on getting out of debt. If you did that, it would leave your finances vulnerable to emergency expenses, which might actually force you further into debt.

As with anything in life, there needs to be some balance.

So, how exactly should you order your financial life so that you reduce your financial risk, while shortening your debt payoff timeline? Well, that’s exactly what I’m going to cover in this article.

You see, not too long ago, my wife and I were in this exact situation. To give you a little background, we were buried in $34K of debt, we had about $8K worth of savings, and we had just gotten married. We knew we wanted to get out of debt, because the payments were hurting us, but we weren’t all that psyched about risking our precious savings — especially after spending over $10K on a wedding.

It was quite the conundrum.

But here’s the thing, we developed a plan of attack, and figured it out. And six months later — having never completely eliminated our savings — we were debt-free. So, how did we navigate the choice between saving money or paying off debt? Well, what follows are the exact steps we took to do just that.

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1. Determine How Much You Need For Emergencies

I’d like to start this section by telling you that I am a huge Dave Ramsey fan. In fact, his book, The Total Money Makeover was the original reason my wife and I decided to pay off debt in the first place. Anyway, if you are familiar with his philosophy on getting out of debt — and in particular, the 7 Baby Steps — then you know that step one is to build up an emergency fund of $1,000 as fast as you can. This little starter emergency fund is meant to protect you in case of minor emergencies while you are paying off debt, and it is brilliant.

Now, if you don’t have $1,000 sitting in the bank already, then I think this is a great number for which to shoot. Additionally, if you think a $1,000 emergency fund is plenty to protect you throughout your debt payoff journey, then go for it. My wife and I, however, were a little uncomfortable with an emergency fund of only $1,000.

Instead, we decided that an emergency fund of $4,500 would provide us the comfort we needed to pursue our debt payoff plan without too much risk. You see, that was enough to cover our health insurance plan’s individual max out-of-pocket if one of us were to run into any medical troubles. As a new husband — and having grown up in a family that went through a number of health struggles and high medical bills — this was a much more comforting number than $1,000.

Of all Dave Ramsey’s baby steps, this was the only one from which I deviated. And, if you feel like you need a little more security than $1,000 sitting in savings in order to pursue your debt payoff without remorse, then that’s exactly what I recommend you do too. Just set it within reason.

There’s very few situations where having more than about $5,000 as a starter fund makes sense. Don’t be excessive, just provide yourself with a cushion that keeps you from sitting awake at night worrying about unexpected expenses.

Also, if you don’t already have the money saved up, then you really shouldn’t set your starter emergency fund any higher than $1,000. I mean, let’s be honest, you are operating with less savings than that right now anyway. Don’t extend your debt payoff by trying to build a starter fund that’s more than $1,000.

Save Money Or Pay Off Debt? (Here's What We Did) | Be The Budget

2. Use Excess Savings To Jump-Start Your Debt Payoff

Okay, now that you’ve decided on a number for your starter emergency fund, it’s time to throw any savings you already have over and above that amount at your debt. And while it might be tempting to hit your high-interest debt first, we recommend the debt snowball method.

If you are unfamiliar with this method, it is just a debt payoff strategy where you pay off your debts from smallest to largest. I know what you’re thinking, that doesn’t make mathematical sense. But here’s the thing, we are humans, not robots, and by paying off your smallest debts first, it allows you to experience a series of small wins along your debt-free journey. And each of those wins is like a motivational shot in the arm to keep going.

This was the method we used to get out of debt, and I can tell you, it is weird how motivating it is.

Ok, so let’s go through a quick example here.

Let’s say you have $10,000 in savings, and you decided to set your emergency fund at $2,500. That means you should take $7,500 and put it towards your smallest debts. The best part about doing this, is that it can quickly clear a few of your smaller debts off your plate. Trust me, there are few more freeing feelings than completely eliminating a credit card balance or loan from your life. I honestly believe it’s the best way to jump-start your debt payoff journey.

For more information on the Debt Snowball method, and to estimate your debt payoff timeline, be sure to check out our Debt Snowball Calculator.

3. Live On A Strict Budget

I know I talk a lot about budgeting on this website, but what do you expect? I named it Be The Budget for a reason. Anyway, of all the things you can do when trying to get out of debt, living on a strict budget is the most important.

This will help you protect your starter emergency fund, track your debt payoff progress, and stay laser-focused on becoming debt-free.

In an effort to squeeze every last penny from our income, when my wife and I were getting out of debt, we lived on an extremely strict budget. Seriously, we sat down and talked about our budget every single night. I’m not joking. Every night, we would log every expense from that day, and search for areas of financial waste. Budgeting, alone, cut 3 months off our original debt payoff timeline. Crazy, right?

Honestly, whether you are trying to save money or pay off debt, I truly believe that living on a strict budget is the most important thing you can do.

4. Speed Up Your Debt Payoff By Making Extra Money

There’s no doubt that when you decide to pay off debt instead of saving money, it can be stressful. The good news is, one of the best ways to combat it is to make extra money. Here’s the thing, when you are working through a debt payoff plan, and you make a little extra money, it takes a little bit of pressure off of you. You get to decide whether you want to throw it at your debt, which will speed up your payoff timeline, or add a little cushion to your savings, which can reduce a little of your stress.

Every extra dollar is gravy.

That’s why I was extremely motivated to make extra money than when my wife and I were getting out of debt. Whether I was working with my hands, or doing a little freelance web development on the side, every extra dollar of income made a huge difference.

So, if you are struggling to choose between, saving money or paying off debt, then you might benefit from generating a little extra income.

5. Finish Strong

When we first decided to get out of debt, my wife and I made a pact. We agreed that the moment we had the opportunity to be completely debt-free — while still leaving at least $500 in savings — we would seize the opportunity. And guess what, in the sixth month of our debt-free journey, when our outstanding debt dropped below our total available cash (emergency fund included) we paid it off in one big, glorious, final chunk.

In other words, the instant we saw the way out, we took it.

Now, this might seem like a risky move, and it might not be for everyone. But, in our eyes, it was like sprinting the last 100 feet of a marathon. There’s just something satisfying about finishing strong, and we wanted that feeling.

The benefit of this method is that it decreases the amount of time you operate with a small savings account. I mean, does it really matter if you use the majority of your savings to pay off debt at the beginning of your journey, or the end? I would personally rather risk spending one month with $500 in a savings account after becoming completely debt-free, than operate with $1,000 in savings for the entire debt-free journey. But that’s just me.

So, what’s your opinion? Would you rather save money or pay off debt? Be sure to comment below.

Oh, and if you haven’t subscribed to Be The Budget, you should go do so right now!

Should I Save Money Or Pay Off Debt? | Be The Budget

Zach Buchenau

About The Author:

Zach Buchenau is a self-proclaimed personal finance nerd. When he isn't writing about budgeting, getting out of debt, making extra money, and living a frugal life, you can find him building furniture, fly fishing, or developing websites. He is the co-founder of BeTheBudget, and Chipotle's most loyal customer.

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  1. Hi there!
    Love your articles & have found them
    So helpful this week as I’ve F-I-N-A-L-L-Y decided to take total control of my money.
    Your recommendations have been super helpful- I got the Every Dollar app Monday , made a budget immediately and have done GREAT this week.

    Today I canceled several subscriptions including the gym that I won’t visit during a pandemic, automatic deliveries etc. and lowered my Internet bill… All for a total of nearly $200 per month in savings! Woo hoo!

    To answer your question, I think I’d rather pay off debt then save, but my first thought was, “both!”

    Thank you~ thank you~ thank you. 🙂

    1. Hi Lara!

      This is one of my all-time favorite comments! You’re crushing it!

      Keep up the awesome work, and be sure to keep us updated on how things are going.


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