Debt: Paying It Off Or Saving Up - Bitter to Richer (2024)

I hear this debate all the time – people are always wondering if they should pay off their debt or save up some cash to keep on hand. The short answer? Both – if you can, and if you need to. I know that’s not what you may want to hear, and it may even leave you scratching your head, but the solution is pretty simple and this is one of the few things that most financially-savvy people can agree on (or at least agree to do something incredibly similar).

So…How Do I Save And Pay Off Debt At The Same Time?

Paying off debt and saving are actually fairly simple, but unfortunately they’re not always easy. Doing both at the same time makes it even trickier. Clearly, if you have a low income, doing both at the same time is nigh impossible, so you may have to focus on building a miniature emergency fund first. Personally, if I were starting from scratch and had a large amount of debt, I’d start by saving up a very small emergency fund. If you’re interested in learning more about emergency funds, you can check out my other article.

Now, since I’d be working with a lot of debt and no actual cash, this small emergency fund would essentially just be a buffer to save me from unexpected expenses and potentially having to take on more debt. A lot of people recommend saving about $1,000 for this small emergency fund, which is good, but if you want a little more cushion the equivalent of one month worth of expenses would be even better.

I also suggest you put this emergency fund in a high-yield savings account so that you do have easy access to it, but it is also making more interest than a standard checking account. Personally, I’d go with Axos as the bank you use for an emergency fund. If you already have a bank with great options for savings accounts, it’s always nice to be able to keep it all in one place for easy management too.

If you have a lot of issues spending less than you make, you need to start a budget as soon as possible. I’d hope it would go without saying, but there is no real way for you to pay off debt or save if you are spending more than you’re making. Additionally, even if you aren’t spending more than you make, making a basic budget may help you get your finances on track. Not only can it help you monitor your expenses, but it can help you find places where you can easily cut excess spending.

Okay, going forward, let’s assume you have either $1,000 in the bank or the equivalent of one month of expenses saved up. We’ll also assume you’ve found where you’re spending too much (if you were at all) and are making at least a little more than you spend. Now it’s time to attack your debt.

What’s The Best Way To Tackle Debt?

The best method for most people seems to be the debt snowball, but the debt snowball, but the debt avalanche method also works well if that’s more your speed. No matter the strategy you use for paying off the debt, it’s important to do what works for you and is something that you can do consistently. The psychology behind paying off debt is a huge part of the battle. If you try to pay off debt in a way you won’t be able to keep up with, you’re bound to fail.

For example, spending all of your discretionary income on debt often leads to you giving up early and falling into bad spending habits. During this period, it is important to keep your needs met – outlandish wants can obviously wait. Another example I see is that people will frequently quit if they don’t see results fast or don’t see the types of results they’re expecting. That leads us back to my comment on the different methods for debt repayment. Choose one, stick to it, and be honest about which will work best for you.

Congrats! Whether it takes you 6 months or 6 years (based on income and amount of debt) you will eventually be debt-free and have some spare cash if you follow what I’ve mentioned above. Now it is time to work on saving up a considerably larger amount of money. The good news here is that you’ve got several options!

This is where a lot of people get conflicted about building more of their emergency fund or investing. Here you can do both, like you did before, or you can focus on one at a time. In this case, I would build up my emergency fund in my Axos account so that I can just focus on investing going forward.

Once you hit 6 months’ worth of savings in your emergency fund, you’re probably set. Based on your income, expenses, and job volatility there are arguments for having a larger or smaller emergency fund. Do what you feel the most comfortable with and don’t worry about naysayers. I’d rather have a little too much money sitting in a savings account (rather than being invested) if it helped give me peace of mind about my financial security.

What Next?

Now comes the fun part – saving more and dumping it into investments. Low-fee index funds are usually a safe bet. Both beginner and advanced investors will frequently turn to them for most of their portfolio. If you don’t have a lot of experience investing or saving, Acorns is a great platform for beginners that can really set you up on the right track. If you’re a little more advanced and have an idea of what you want, I recommend going with M1 Finance or Vanguard – I use both of them at the moment and love it.

Conclusion

I know there is no perfect answer for everyone, and I can’t discuss everything in a short article, but I hope I helped give you some of the tools and basic information you need in order to get started. If you have more questions concerning more specific priorities, like which should take precedence between a 401k (to the match), an emergency fund, general investments, a Roth IRA, or anything else, feel free to discuss it in the comments. Alternatively, discuss it with a financial advisor. In order to give accurate, personal recommendations, a lot needs to be known about your entire situation.

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