Pay Down Debt Or Save; Which Should Be First?

Some arguments stand the test of time. “What came first, the chicken or the egg?”. “Paper or plastic?”. “Do you prefer cats or dog?”. I know these have zero to do with personal finances but you can add one more argument to the list. The point I’m trying to get across is I believe the question of paying down debt versus building savings will become a long-standing debate.


Many understand the importance of both saving money and eliminating debt but how do you determine which is more beneficial over the other? Debt will undoubtedly get in the way of accruing savings simply because funds that are allocated to debt are made unavailable to put away for savings. Unfortunately this debate does not have a cut and dry answer. The good thing is that both are beneficial so it may seem like there is no wrong answer which is partly true however the answer can vary from person to person.

Your current situation will have more impact on the direction you should choose. For this argument we are excluding debts like mortgages or car payments providing you still use them. We want to focus on outstanding debts. The first order of action is to rank your debts from worst type of debt to less harmful kinds of debt. Anything currently in collection for less than two years should be a priority. Consumer debts like credit cards from banks or merchants should come next. Private student loans should follow, next comes education loans provided by the government and last will come medical bills.

Next you will have to look at your current interest rates on your debts. Higher interest debts need to be tackled first because the balances on these accounts will snowball and get out of control. If you are unable to find the interest rate info yourself, call and ask the correct customer service specialist. I like to tell people to eliminate the easiest or smaller debts first. This does two things one, it builds confidence in the fact that you have accomplished something and two your credit scores will receive a nice boost as a result of paying down and eliminating debt.

Saving money is something that I believe in to the core. It should be done often and the amounts should remain consistent. If you can comfortably save 10% of your pay every pay period, do so regardless of the circumstance. Overtime you will begin to see the accumulation. Once the habit is established one can develop into a savvy saver with different savings accounts and saving strategies.

Therefore if you have large amounts of debt you should be saving and paying down debt at the same time. You will have a stronger emphasis on paying down debt but you will still manage to save what you can. Waiting to save could cost you in other ways down the line, especially if you are without an emergency fund and that inopportune 911 event pops up.