How to Balance Debt Repayment and Saving (2024)

This post is from our regular contributor, Erin.

Have you ever wondered which you should be focusing more on: debt repayment, or saving?

Chances are, if you’re like many millennials who graduated with student loan debt, you’ve wrestled with this thought at one point or another.

Knowing which to prioritize can be overwhelming at times. There are gurus out there who declare that debt is an emergency and should be treated as such; then you have others telling you to build up an emergency fund ASAP in case something goes wrong.

On limited funds, what are you to do!?

I’ve been there, as I graduated with student loan debt myself, and also felt the need to save as much as I could because I saw my parents fall into debt due to lack of savings.

It can be difficult to deal with pressure coming from both sides, but I hope my insight into how to balance debt repayment and saving can help.

1) What Type of Debt Do You Have?

I think everyone needs to be aware of all the little details of their debt. What type of debt you have makes a difference, as interest rates are going to vary from each (you probably don’t have a 2% interest rate on your credit cards, but you might on student loans).

My advice is to list out all of your debts so you can order them in a useful way, whether that’s from lowest to highest balance, or lowest to highest interest rate.

I know this can be painful, but you have to be aware of your totals in order to know if it makes sense to focus on saving or debt repayment.

For example, if your interest rates are pretty low (2-3%), then it might make more sense to focus on saving right now. Those that do are confident their money will earn them a better return in the markets.

That might be the case, but remember to actually save your money and invest it so it’s working for you!

2) What Does Your Current Financial Situation Look Like?

After you have your debt information listed out, you need to factor in your monthly expenses to figure out how much you can realistically afford to put toward debt and savings every month.

Hopefully you’ve been tracking your expenses or have a spending plan set up, as this will make balancing debt repayment and saving easier. You’ll already know where your money is going, and you should have a good idea of what you can cut out if need be.

Tally up all your expenses (minimum payments on debt included), and subtract that from your total income each month. If you have anything leftover, you need to decide where it’s going to go: to debt, or savings.

3) Figuring Out Savings in Case of an Emergency

You already know how much you need to put toward your debt, at a minimum, every month. What should you put toward savings? Assuming you need an emergency fund, here are a few things to consider:

• How many things do you own that you’d be responsible for paying to repair/take care of? (Car, house, rental properties, pets, etc.)

• If you were to lose your job, how long do you think you’d be out of work for? Is your network strong? Is your industry doing well?

• What could you do to reduce your living expenses if worse comes to worse? Create a “backup budget” to reflect this.

Again, there are a lot of different recommendations out there on how much you need saved up. 3-6 months of living expenses is recommended, but if you’re a young adult who rents and doesn’t have much liability, then you might be okay with less.

Personally, I’m all for having some sort of savings, even if it’s $500-$1,000 – whatever you can muster. Especially if you’re at risk of falling back into a vicious cycle with consumer debt.

You can always start with saving first, and switch your focus to debt repayment once your savings fund is good to go.

4) How Long Will It Take to Pay Off Your Debt?

Now that you’ve taken stock of your financial situation, you should estimate when your debt payoff date will be based on your current income.

Of course, we can always hope things will improve, but it’s good to do a conservative estimate for the time being.

I really like unbury.me‘s debt repayment calculator as it allows you to focus on either the snowball or avalanche method of paying off debt. Enter what you can currently afford to pay toward your debt, and see how long it will take to pay back.

Is the number of years too difficult to swallow? Or are you okay with how long your journey will take?

If you want your debt gone sooner, then feel free to take that extra money and direct it toward debt payoff.

5) How Long Will It Take You To Save?

If you’re struggling with whether or not to save outside of an emergency fund, list out your savings goals.

Do you want to save for a trip, for early retirement, a new computer, or a down payment for a home?

Are your savings goals more short term, or long term? You need to compare your debt payoff and savings timelines.

For example, say it’ll take you another 5 years to pay off your debt, but in the meantime, you want to save $700 to go on vacation next year.

If that’s the case, it makes sense to focus on debt repayment while saving a little each month to fund your vacation. Saving $700 in one year should be fairly doable. The same goes for a new computer.

If you want to save for retirement, try saving in small increments (matching contributions anyone?) until your debt is paid off.

Focus On What Feels Right

Whenever you’re dealing with finances in this capacity, it’s okay to be emotional.

Maybe you’re seriously sick of your debt and you’re ready to kick it to the curb. If that’s true, then your gut could be telling you to forget about saving and to kill your debt.

On the other hand, your heart could be telling you to stash some cash away for a rainy day. You don’t want to stress about not being able to afford an emergency should one come up.

Sometimes you just need to do what’s right for you regardless of the advice others offer. Everyone’s situation is different, and you can change your focus at any time depending on that situation!

You can also decide to save and pay off debt. My minimum student loan payment is $200, but if I have $400 leftover at the end of the month, I can put $200 toward my savings goals as well. Or, I can alternate putting that $200 toward my student loans and savings every other month. There’s no right or wrong answer.
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I’d be remiss not to mention one of the benefits of side hustling is that it can help you reach either of these goals quicker. I’ve seen many bloggers pay off their debt or fund their savings with just their side income.

Bottom line: don’t base your decision on what everyone else insists is correct. Only you know what the right decision is for you. Debt repayment and saving are both awesome financial goals, and you’ll be moving in the right direction either way.

Have you had to decide between debt and saving before? What path did you choose and why?