When it comes to managing your finances, one of the toughest questions you may face is: Should I save money or pay off debt first? Both are important for your financial health, but, depending on your situation, one may make more sense than the other. Let’s break it down so you can make the best choice for your goals.
Saving money gives you a safety net. It helps you handle unexpected costs, like a car repair or medical bill, without turning to credit cards or payday loans. Paying off debt, on the other hand, reduces what you owe and can save you hundreds or even thousands of dollars in interest over time. Both steps move you toward financial freedom - just in different ways.
If you have high-interest debt, like credit cards or personal loans, it usually makes sense to tackle those balances before saving more. Interest rates on credit cards can reach 20% or higher, which means your debt grows fast. Even if your savings earn a small amount of interest, it won’t keep up with what you’re paying in debt interest. Paying off high-interest debt first can also free up cash in your budget and lower financial stress.
Payoff Genius can help you identify your high-interest debt and make a smart plan to pay it off.
If you don’t have an emergency fund, start there. Aim to save at least $1,000 or one month’s worth of expenses before aggressively paying off debt. You don't want an unexpected car repair or a plumbing disaster to put you in a position to spend more on your credit cards, or worse - take out a payday loan. Once you have that cushion, shift more money toward paying off what your high-interest debt.
Note: The right size emergency fund is different for everyone. $1,000 is often quoted as the absolute minimum, but you should consider your personal situation. If you have children, own a home or car, or don't have insurance, your ideal emergency fund might be higher.
You don’t have to choose one or the other - you can do both. Many financial experts recommend a 50/50 approach: put part of your extra money toward savings and the other part toward debt. This way, you’re building financial security while still making progress on what you owe. You can adjust this balance over time as your situation improves.
For example, once you have an emergency fund, you may shift 100% of your extra money toward debt payments until you've paid off your credit cards.
So, is it better to save money or pay off debt? The best answer depends on your personal situation. If your debt has high interest, focus there first. If you don’t have any savings for emergencies, build that safety net first. A smart mix of both strategies will help you reduce stress, gain control over your money, and move closer to financial freedom.