Should you save money when you are in debt? This is a question one of the readers posted on one of my recent money posts. Personally, I think you should pay off debt first then save BUT only after you have secured an emergency fund because NOT having an emergency fund whilst in debt means you will incur (have to borrow) more debt to pay off any future emergencies and this will take you even longer to clear your current debt. If, however, you interest rates are super low (not variable), you can save money.
When I started my debt free journey, I asked myself this question several times, ‘should I start putting a little aside whilst I am paying off my debt’? But whenever I crunched the numbers, there wasn’t any money left for me to crunch, I had already pinched everywhere I could in my budget and for me at that time, it wasn’t feasible to save and pay off my debt at the same time. But, using the snowball method, as I started to clear one debts one after the other, I started saving a small percentage to build my buffer aka emergency fund.
So, now that you know my personal views, let’s see what the money experts say, should you save money when you are in debt?
Disclaimer: I am not a financial advisor, all opinions shared are my own.
Regular readers will know that I have re-picked up my love of reading but with a difference, I am not longer reading romantic fiction but rather more money focused and self help books. I recently shared my thoughts on ‘Black Girl Finance‘ and ‘All Your Worth‘ both of which are incredible money books that I highly recommend. As I strive to educate myself more on persona finance and learning to manage my money better, I went straight to our favourite money Guru – Dave Ramsey.
Thanks to his snowball method I was able to pay off my debt within 18-months as opposed to 36 months if I had chosen the Avalanche Method. I wanted to do my reader justice by researching what the experts think on the topic of, ‘should you save money when you are in debt?’. The responses were varied and with good reason because each had its own pros and cons and I want to share one piece of advice I have learned from Dave Ramsey and that is his 7 baby steps to managing your money.
Dave Ramsey actually tells people to put off ‘saving for retirement’ until you have cleared your debt and I think the 7 baby steps below helps explain it better.
Step #1 – Save $1000 (£1000) for Emergency Starter Fund
When you are in the thick of paying off your debt, saving £1000 for an emergency fund can feel like a mammoth-like task but it is so important to have one. Emergency funds are some of the best savings you can do for yourself and your family, having an emergency fund will stop you from falling into more debt. I always have £1000 in my account at anyone time as that is my buffer money for any unexpected expenses.
Step #2 – Pay Off all debt (excluding your mortgage) using the snowball method
For those who are not familiar with the snowball method, it is basically a debt repayment method whereby you start paying off your debt from the smallest to the largest. I used this method during my debt free journey and it was satisfying seeing the balance of my debt decrease as I went along. Paying off all your debt before you start saving is so important but don’t ignore step #1 as this will support you during your debt free journey.
Step #3 – Fully Fund Your Emergency Fund
A fully funded emergency fund consists of 3-6 months worth of all your household expenses. I am fortunate to be in a position where I have a fully funded emergency fund and its something I worked on as soon as I paid off all by debts. Having a fully funded emergency fund means you are unlikely to fall back into debt because you will have the money handy to pay off any emergencies that might arise and since you have paid off your debt, you don’t need to incur more.
Step #4 – Invest 15% of your household income into retirement
As you can see, saving for your retirement does come in after you have cleared your debts and have a fully funded emergency fund. I always view debt as robbing from your future, keeping debt for longer means stealing from your future because instead of saving that money towards your retirement, you are borrowing against it by delaying your funding of your retirement account. When you have cleared all your debt it is east to allocate 15% of your income to your pension and a lot tougher if you are still in debt.
Step #5 – Save for your kid’s college fund
I don’t yet have kids but I think for those with kids its so important to start thinking about saving money for college (university in the UK). Sure, we get government support in the UK but many young adults are starting adulthood with a mountain of debt before they even get a job. This is why it pays to save for their education so you can lesser their future burden and give them a level playing field.
Step #6 – Pay off your Mortgage Early
For those of us with mortgages, it’s always a dream to be able to pay off the mortgage early and not have to worry about the bank repossessing it. I personally want to pay off my mortgage long before I retire so I can enjoy complete financial freedom which is hard to achieve when you have a huge mountain of debt.
Step #7 – Build Wealth and Give
I am sure everyone dreams of a time when there will not have any debt, will have enough money to retire on and have enough left over to gift their descendants. My dream is to break generational curses barriers and want to change the future for the next generation. We don’t want to gift them debt but rather something to kick start their livelihood on a debt free platform but still teaching them the important of working hard, saving money and investing for the future.
So, should you save money when you are in debt? This can only be answered by you, but personally I think you should clear your debt first then start saving. But, I also think that if your only debt is a couple hundred on a credit card and paying off your sofa then I think you can do both so long as you have already built your starter emergency fund or have it fully funded.
