Saving Money or Paying Off Debt: How to Decide Which Comes First
Saving money and paying down debt are top financial priorities for many. If your budget already feels stretched, it can be tough to know how to prioritize these competing goals. Everybody’s personal circumstances are unique, but this guide can help you decide whether to save or pay down debt first.
Review Your Current Finances
If you don't already have an established budget, consider creating a 50/30/20 budget that helps you split your finances into three buckets for simple tracking. Make sure to list out the amount of debt you have and how much money you have saved. Once you know how much of your income you can put to either saving or paying down debt, you’re ready to determine which strategies can help you succeed.
If Your Priority Is Saving
Follow these tips for achieving common saving goals:
- Build up your emergency fund
An easy way to get in the habit of saving is to set up an automatic direct deposit or transfer to a savings account at the beginning of each month. The money is out of sight, out of mind, which will help it grow. Most experts recommend shooting for an emergency fund with three to six months' worth of living expenses. KeyBank also offers EasyUp® that automatically transfers money to your savings when you use your debit card for purchases.
- Long-term savings and retirement planning.
Enroll in or consider increasing your contributions to a tax-advantaged retirement program. Your employer may even offer a 401(k) program with matching contributions, meaning your employer matches the amount you contribute up to a certain amount. To get the most from this benefit, contribute at least enough money to earn the match. If a 401(k) isn't available, individual retirement accounts (IRAs) are available to anyone and offer similar tax advantages that can go a long way toward helping you grow wealth.
If Your Priority Is Paying Down Debt
Explore these strategies for debt payment:
- Pay down multiple balances.
Choose from one of two popular strategies: the debt avalanche or the “debt snowball.” With the debt avalanche, you pay down your highest-interest debts first. Once that debt is paid off, apply the money you've freed up toward the next highest-interest debt until all debts are paid off. With the debt snowball method, you start with your smallest debt first and increase momentum as you work your way up.
- Save on interest payments.
Consider a debt consolidation1 loan to merge multiple balances. By consolidating your debt, you only have one payment to keep track of and lower interest rates are often offered.
Achieve Your Financial Balance
The approach that you take doesn't have to be all or nothing. For example, you can put most of what you have toward emergency savings and set aside what you need to make more than your minimum credit card payment each month.
By doing what feels right for your unique financial situation, you’ll gain the confidence you need to make your goals into reality. And if you’d like to discuss how to get started, contact KeyBank for a free Financial Wellness Review.
Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer repayment term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter repayment term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
Content provided for informational and educational purposes only and is in no way to be construed as financial, investment, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal financial issues.
