Learning Center

Hi, I'm Mark, the host of SAFE Cents! Welcome to our Learning Center, a place where you can improve your financial health.

Should You Prioritize Saving or Debt Reduction?

Blog Post
2 min read
Pink piggy bank with a question mark made out of money above its head.

When you only have a little wiggle room in your budget, it can be hard to know whether to focus on boosting a dwindling savings balance or paying off mounting debt. Multiple credit card balances and hefty loan payments can work as an anchor to stall your financial dreams. But lacking a financial safety net can also weigh you down. Compare the advantages of these two competing priorities to help you set sail on your next financial adventure with confidence.

When Prioritizing Saving Might Be a Good Idea

Here are some situations where prioritizing saving over debt reduction might be the better choice.

  • Your debt balances are low, and so is your interest rate. If the debt interest rate is lower than potential investment returns, focusing on saving and investing may be more beneficial than aggressively paying off low-interest debt.
  • You don’t have an emergency savings fund. According to a recent poll by Bankrate, almost 25% of Americans have no emergency savings. That's scary! Without a financial safety net equal to at least three months of living expenses, it’s easy to slide further into debt by using credit cards and loans to pay for unexpected costs. An emergency fund provides an interest-free way to cover unbudgeted, but necessary expenses.
  • You have your eyes set on a big-ticket purchase. If you plan on buying a home or have another time-sensitive goal within the next two years, saving money could ensure you have the necessary resources when the time comes.

When Debt Reduction Might Be a Good Idea

While prioritizing savings offers significant financial benefits, so does eliminating debt. Here are some situations where prioritizing debt payments instead of growing your savings might be the better choice.

  • You have high-interest debt. It can be challenging to manage high-interest debt as it can snowball even if you’re not making new purchases. Paying more than the minimum required each month, while avoiding new charges, reduces the total interest paid and helps you become debt-free faster. SAFE's in-house Financial Wellness Counselor can get you informed on the benefits of debt consolidation--a tactic that helps you combine your high-interest debt under a single loan with a lower interest rate.
  • Your debt is harming your credit score. Paying down balances and keeping them below 30% of the credit limit could improve your credit score. Higher credit scores can help you secure lower auto insurance rates and avoid hefty rental deposits.
  • You are experiencing high levels of financial stress. When debt becomes overwhelming, it can consume your thoughts and negatively affect your mental well-being. Reducing debt can help relieve financial pressure and emotional stress, allowing you to regain control and peace of mind.

How to Decide

Review your short- and long-term financial goals. Develop a plan that balances saving for important milestones with debt repayment. The financial strategy that works best for you is the one that helps you achieve your goals with confidence.