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Paying Off Debts-Before or After Saving?

by Elle on June 22, 2010

Understanding Finances and Our Personalities

One reason I love reading and writing about personal finances is because there are so many ways to approach it. Just look at how many personal finance sites there are, you’ll realize that people can come to completely different conclusions on what to do with their money.

The answer can be difficult to decide because each one of us have different financial circumstances. This site focus on couples and finances, other blogs address college students, singles, older people, etc. Finances are as personal as we are, whether we realize it or not.

A decision people face is figuring out whether they should pay off debt first or if they should be savings first. They are factors to consider before you make a decision. You can make a case for either way. I wanted to share some of my thoughts on the process I picked and then see what you think about it.

Everyone has an opinion on paying down debt.

Everyone has an opinion on paying down debt.


Pay off Debts First or Build an Emergency Fund?

If our financial decisions were purely based on numbers, then paying off the debts immediately would be the way to go. You come out better typically when your debts (like credit cards) have a higher interest rate than what savings can give you.

The problem with that line of thinking  is bad stuff happens to all of us at unexpected times.

If you’re focused and are putting every single extra penny you have into paying down your debts, you can caught in a bad predicament if you have no savings.  If you have to fix your car or if your dishwasher breaks, then you may be tempted to go back and charge it to your credit card. It can be a discouraging cycle.

I’ve had family emergencies pop up while I was trying to pay off my credit cards. I know it happens, so I tend to encourage people to go ahead and save some money first.

Dave Ramsey suggests having a baby emergency fund of $500-$1,000, depending on your circumstances. That’s a pretty good rule of thumb. I think you should have $1,000 or one month’s expenses as a bare bones emergency fund. If you’re married and have kids, you should focus on having a bigger cushion than a single college student.

Save While Paying Off Debts

After you have your bare bones emergency fund in place, you may consider paying your debts down while still aside some money for building up your emergency fund. There’s no rule that says you can’t do two things at once. Debt Free Adventure has a wonderful 75/25 method on paying down debt while saving.

Personal Finance is Personal

What you read online isn’t the whole story. Even with bloggers being transparent there are other factors involved when decisions are made. Instead of nit-picking and critiquing on what other people choose as their financial game plan, try focusing on building your own finances.

My hope is that we can discuss topics by sharing our thoughts on it and keeping it productive.

Photo Credit: Andres Rueda

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Tagged as: emergency fund, pay off debts

  • http://www.DebtFreeAdventure.com Matt Jabs

    I say save until you build up a comfortable EF, whatever that may be on an individual basis, then resume debt slaying.

  • http://ownthedollar.com Hank

    I found myself struggling with this as well. You talk about saving in an emergency fund. I also kept trying to invest while paying down debts.

  • http://wifeyofaroadie.blogspot.com/ wifeyofaroadie

    This article was very interesting and helpful. Having a husband who is an independent contractor has really taught us the value of keeping our debts low as well as saving for a rainy day. – WOAR

  • Elle

    @Matt: You make a really good point – having some savings is about having some security. Each of us have a different number in our minds, but I think the principles hold up well.

    @Hank: That’s definitely a hot topic for some personal finance bloggers. If you get a company match with your 401(k), that may be a reason to invest while paying down debts. You should also compare interest rates with return on investments. Thanks for mentioning that plan too.

    @WOAR: I appreciate you stopping by and sharing your thoughts! Keeping debts low can give you a lot of freedom too; you don’t have to take a job just so you can pay down the bills.

  • http://pastdueradio.com Derek Sisterhen | Past Due Radio

    Good stuff, Elle – as usual!

    It seems that there are two steps to getting out of debt that occur before we actually begin paying extra on what we owe: First, stop going further into debt; second, save up some money for emergencies. Without the savings, we perpetuate that borrowing cycle if something unexpected comes up.

    When it comes to the basic emergency fund, though, I differ with Dave Ramsey. I think $500-$1,000 is a baseline, but depending on the employment situation or needs of the household, that may need to be extended to a month or two worth of expenses. And if there is no cushion like that in place, I’m going to pull back on retirement savings until there is – the risk is just too high.

  • http://couplemoney.com/ Elle

    Thanks Derek! I think that having one month’s expense can give you some piece of mind while you reduce debt. When I was a college student it wasn’t much, but it was also a boost that motivated me.

  • http://www.debtmediators.com.au/blog/ Bankruptcy Ben

    I encourage people to pay down their debts first. Maybe you get 2.5% in savings how much are you paying in interest on your credit card? 14%? You’re 11.5% worse off every year. An emergency fund is a false ecconomy and will actually STOP you from getting out of debt.

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