Is It Smart to Pay Off Debt Before Saving?

One of the most common financial dilemmas people face is deciding whether to pay off debt first or focus on saving. Both are essential to financial stability, but choosing the right approach depends on several factors, including interest rates, emergency preparedness, and overall financial goals.

Paying off debt as soon as possible can be a smart move, especially if you have high-interest loans like credit card balances. The longer these debts remain unpaid, the more they grow due to interest accumulation. Credit cards, for example, often have interest rates, which means a small balance can quickly become unmanageable. Eliminating high-interest debt first can save you money in the long run and free up more income for savings later.

However, prioritizing debt repayment without any savings can leave you vulnerable in emergencies. Unexpected expenses—such as medical bills, car repairs, or sudden job loss—can push you deeper into debt if you don’t have funds set aside.

This is why financial experts often recommend building a small emergency fund before aggressively paying off debt. Even having just one month’s worth of expenses saved can prevent further borrowing when life throws unexpected challenges your way.

A balanced approach is often the best strategy.

You don’t have to choose between debt repayment and saving—you can do both at the same time. For instance, you can allocate a portion of your income to an emergency fund while making extra payments on high-interest debt. Once you have a financial cushion, you can shift your focus toward eliminating debt more aggressively.

There are also instances where saving before paying off debt makes sense. If your employer offers a retirement plan with a matching contribution, it may be wise to contribute enough to take advantage of the match, as this is essentially free money.

If you have a low-interest loan, such as a mortgage, it might be better to save and invest your money rather than rush to pay off the debt.

Ultimately, the right approach depends on your financial situation. If your debt carries high interest, paying it off quickly should be a priority. But if you don’t have any savings, setting aside a small emergency fund first is crucial. The key is to strike a balance that ensures financial security while minimizing costly debt. (GFB)