Pay off debt or save? Expert tips to help you choose

A common financial struggle for Americans is deciding how much money to devote to savings versus paying down debt. While the answer varies on a case-by-case basis, it’s often important to strike a balance between the two.

Wiping out high-interest debt on a timely basis will reduce the amount of total interest you’ll end up paying, and it’ll free up money in your budget for other purposes.

However, while it’s important to focus on paying down debt, it can be equally important to devote money to emergency savings. In fact, 36 percent of U.S. adults are prioritizing both debt repayment and building emergency savings, according to Bankrate’s 2024 Emergency Savings Report.

While there’s no right answer for everyone on how to juggle debt repayment and saving money, here are a few scenarios for when each choice makes more sense.

Bankrate’s insights on credit card debt and savings plans

When to make saving a priority

Here are some valid reasons for putting more of a focus on saving money than reducing debt:

Debt with a very low interest rate: Nearly half (44 percent) of American credit cardholders carry debt from month to month, according to Bankrate’s Chasing Rewards in Debt Survey. If you carry a balance that happens to be at a very low interest rate, it may make sense to save first, says Melissa Joy, a certified financial planner and founder of Pearl Planning, a financial planning and wealth management practice in Dexter, Michigan.

Access to an employer 401(k) match program: Insufficient retirement funds commonly keep people from financial security, with 41 percent citing it as a reason they’re not financially comfortable, according to Bankrate’s Financial Freedom Survey. If you have a retirement savings plan through your job, it may come with an employer match. Try to contribute at least enough to get the maximum employer match, which is essentially free money you could be missing out on.

No emergency savings: The top reason to make saving a higher priority than paying down debt is to build your emergency fund. Over half (59 percent) of people say they’re uncomfortable with their level of emergency savings, according to Bankrate’s Emergency Savings Report. In the absence of such savings, you could simply wind up adding to your credit card debt to pay for an unexpected expense.

“If you don’t have any savings, focusing solely on paying debt can backfire when unexpected needs or costs come up,” Pearl Planning’s Joy says. “You might need to borrow again, and debt can become a revolving door.”

How much should I save?

Experts recommend building an emergency fund of three to six months’ worth of expenses and stashing it in a high-yield savings account. Some even recommend putting enough cash in the bank to be able to pay your expenses for an entire year.

But you have to start somewhere. Aaron Graham, a tax planner with Holistiplan, suggests starting first with a goal to cover a single month’s expenses.

“There is no excuse for not saving for these emergencies,” Graham says. “It’s not a question of if they will happen, but when; plan accordingly.”

In the process of establishing emergency savings, it’s important to store those funds in a savings account that’s convenient and earns a competitive interest rate. Finding a top-yielding savings account means you’re getting more money in return on your savings.

Building up your emergency fund often goes hand in hand with creating and following a budget. In addition to incorporating line items into your budget for things like mortgage or rent, utilities, transportation and groceries, include line items for dollars you’ll devote to savings each month. Examples include an emergency fund, a down payment on a home or a car, or a vacation fund.

Preparing for economic challenges in 2025

A bit of advanced preparation can help you weather any difficulties you may experience this year when it comes to your income and expenses. Taking into account both personal financial habits and the larger economic landscape is crucial for making informed decisions about your debt and savings.

It may be tempting to turn to credit cards when economic challenges arise. But relying too heavily on credit cards can quickly lead to accumulating unmanageable debt with high interest rates.

The problem of credit card debt is especially pronounced among those with lower incomes. Among cardholders, 60 percent of those earning $25,000−$49,999 carry a balance, while 56 percent of those earning less than $25,000 carry one. By comparison, just 52 percent of those earning $50,000−$99,999 carry a balance, while only 37 percent of those earning $100,000 or more carry one, according to a Federal Reserve study.

Preparing for economic challenges and living within your means, especially during uncertain times, can be a key strategy to avoid falling into the trap of debt.

Reduced income

Although economists say the odds of a U.S. recession in the year ahead continue to hold at 33 percent, job growth is projected to continue its gradual decline, according to Bankrate’s Economic Indicator Survey,

Another common enough reason for finding yourself with reduced income is switching to a new job that earns less money than your previous job brought in.

Continued high prices

Inflation rose to 2.4 percent in September 2024 from a year prior, as measured by the Consumer Price Index (CPI). Last year, in September 2023, the CPI was rising by 3.7 percent.

Inflation has slowed, with the efforts of the Federal Reserve to slow the economy, but prices — particularly in shelter, food and motor vehicle insurance — are still high.

Although high prices and the high cost of borrowing can eat into your budget, rates remain historically high on savings accounts. That means there’s a potential for you to earn more in return on your savings.

Adjusting to income reduction and price hikes

Being proactive about your finances can offer stability when faced with an increased cost of living or a reduction in income. With a healthy emergency fund, you can take on such challenges without resorting to accruing debt. Avoiding more debt can be critical given that, among those who say money has a negative impact on their mental health, 47 percent cited debt as a cause, according to Bankrate’s Money and Mental Health Survey.

If you find yourself out of a job, being able to live off money in the bank means you won’t feel the need to take on the first job opportunity that comes your way. Having a savings cushion also comes in handy in the event you decide to switch to a new job that earns less money than your previous one.

A possible loss in income will be easier to handle if you work to bring down your expenses now. One step you can take is reaching out to lenders and providers to see about lowering your monthly bills.

“It can be easy to assume that whatever amount appears on your monthly bill is set in stone, and for some municipal utilities like water and electricity that may be the case,” says Tony Wahl, a credit and loan expert at Credit Sesame in Mountain View, California. “However, sometimes subscription services like telephone, cable and internet service can be negotiated. This can help prioritize your bills and free up some of your available cash to be added to your savings.”

When to prioritize debt repayment

When you have high-interest consumer debt, paying it down first can help you solve ongoing problems with managing your money. The more you reduce your principal and the amount of interest you owe, the more money you’ll have in your budget each month to devote to savings or other line items.

Get started with repaying your debt by following these four steps:

1. Calculate your expendable income. This is what’s left over after you pay for housing, utilities, transportation, food, and so on.
2. List your regular expenses. Include everything from monthly bills to things you pay for less than once a month. See if there’s anything you can reduce or eliminate.
3. Create a budget based on your income and expenses. Include line items for any and all monthly debt repayments.
4. Identify financial goals and add them to your budget. Create line items for anything from saving for a down payment on a house to saving for a vacation.

Tara Alderete, director of enterprise learning at Money Management International, says it usually makes sense to prioritize debt reduction overall, but there are exceptions.

“If you already have adequate savings in your emergency fund, you may want to focus on quickly eliminating debt,” Alderete says. “However, if you find yourself making only minimum payments on debts with extremely high interest rates, those debts may be causing you to lose money and preventing you from achieving your overall financial goals, and you may want to focus on paying off that costly debt.”

As Alderete sees it, an important part of building a budget is focusing on your priority expenses first, so that you can free up money to put toward a debt reduction plan while hopefully still being able to contribute to an emergency fund.

When to pay debt first

• If your debts have high interest rates that can snowball if not paid off.
• If your debt is causing you significant stress or anxiety.
• If a large portion of your income is going toward monthly debt payments and limiting financial flexibility.

You can use a debt management calculator to determine how much you should contribute to pay off your debt.

Which debt should I pay off first?

To protect your credit score, it’s important to pay at least the minimum monthly payment on every credit card or other loan debt you owe. Beyond that, it can help to prioritize which loans to pay off first based on factors such as interest rate, whether any of your debts’ payments are overdue and the amount of each debt’s outstanding balance.

Strategies for paying off multiple debts at once include:

• Avalanche method: This consists of paying off the credit card or loan first that has the highest interest rate (while making minimum monthly payments on all other outstanding debts). This strategy enables you to knock out the costliest debt first, after which you’ll move on to the next loan with the highest rate, and so on.
• Snowball method: Rather than prioritizing debts with the highest interest rates, the snowball method focuses on tackling the smallest debts first. As you gradually eliminate your smaller debts, you’re freeing up dollars that can be devoted to larger debts.
• Prioritizing debts that most affect your credit score: One factor that impacts your credit score is your credit utilization ratio (the amount of your credit limit compared to what you’re using), and experts suggest keeping credit utilization at less than 30 percent to maintain good credit. As such, it can pay to focus more on paying down any credit cards with high utilization rates. This method can help you improve your credit score as you work to pay down your debt.
• Consolidate your debt: Combining your credit card debt onto a balance transfer credit card provides the convenience of just one monthly payment. This might be worth your while if you can secure a 0 percent promotional annual percentage rate (APR), which gives you some time to pay down the principal while avoiding interest.

Next steps to balance your savings and debt

When it comes to debt repayment, choose a strategy that works best for you. Options include paying off your highest-interest debt first, paying off the smallest debt first or paying the debts first that most affect your credit score.

Debt consolidation may be a good idea if you have multiple high-interest debts. Combining them into one new loan can help you qualify for a lower interest rate, and it conveniently allows you to combine multiple payments into one.

Building up your savings each month as you pay down debt ensures you’ll have funds on hand to cover unplanned expenses that would otherwise put you deeper into debt.

For many, the best solution is to strike a balance between saving money and paying off debt.

“The choice of debt repayment or savings is not an either-or proposition,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “You can, and should, focus on both at the same time. Automate savings right off the top through payroll deduction and direct deposit, then use take-home pay to maximize the debt repayment effort. A savings cushion is the buffer between you and more high-cost debt when unplanned expenses arise, and time is your greatest ally when saving for longer range goals, so don’t delay getting started on savings.”

Bottom line

Finding the right balance between debt repayment and saving is vital for financial stability. By creating a budget and setting goals, you can effectively manage your finances and prepare for potential financial challenges. It’s also important to regularly reassess and adjust your plan as needed. It’s never too late to start saving and paying off debt. The key is to take action and stay consistent.

Bankrate’s Karen Bennett and Sheiresa McRae Ngo updated this article