Should You Use Your Savings to Pay Off Debt?

Photo (cc) by 401(K) 2013

If you’re like many Americans, you have both debt and savings.

So here’s a question: Should you continue to keep your money in savings, or should you spend your stash to pay off your debt?

It may seem like an uncomplicated question, but the answer is anything but simple.

“Like everything else in life, this decision is one of balance, not of absolutes,” Michael Rubin, president of Portsmouth, N.H.-based Total Candor, a provider of financial education, told Bankrate.

According to U.S. News & World Report, working through these questions can help you figure out what financial move is best for you:

  • Do you have emergency savings? Most financial experts agree that emergency savings are a necessity. “Start with at least $1,000 in cash,” Forbes said. It’s recommended that you have a minimum of three months of expenses saved in an account.
  • How costly is your debt? Compile a list of each debt and its interest rate. “If the interest rate is over 7 percent, you’re likely to save more in interest by paying down the debt than you would earn by investing the money,” Forbes said.
  • Is extra money coming your way? “If you expect to receive an additional windfall in the near future, in the form of a payday check, gift from parents, tax refund or any other income boost, then you have a little more flexibility because you’ll have more money to work with soon, and perhaps you can pay off debt as well as save,” U.S. News & World Report wrote.
  • What are your financial goals? If you have plans that require big bucks, like starting a new business or purchasing a house, it might make more sense to keep your money in savings. However, “paying off debt can also be helpful because then you can embark on these new financial adventures without the added weight of old loans,” U.S. News & World Report said.

Money Talks News’ Stacy Johnson examined a similar question in this video about whether to save for retirement or pay down debt.

In the end, it might make the most sense to find a balance between saving your money and paying off your debts. According to Bankrate, personal finance author Paula Langguth Ryan promotes the dual approach, even though you may be able to net more money by paying off the high-interest debt before you save.

However, she says any short-term gain will be lost if you revert to using a credit card to cover emergencies.

“You just replace old debt with new debt,” she says.

Creating an emergency fund is the only way to break the debt cycle, she says. Without such a cushion, chances are good that you will fall back into debt as soon as you’re in a financial pinch, no matter how much money you’re throwing at your current debt.

How have you approached saving versus paying off debt? Share your comments below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
10 Colleges That Offer Free Tuition for Seniors
10 Colleges That Offer Free Tuition for Seniors

These schools let retirement-age students study, tuition-free, while earning college credit.

9 Houseplants That Remove Toxins From Your Indoor Air
9 Houseplants That Remove Toxins From Your Indoor Air

These plants may also do everything from reduce the amount of dust in your home to improve your productivity.

7 Reasons You Should Not Claim Social Security Early
7 Reasons You Should Not Claim Social Security Early

The sooner you claim your Social Security retirement benefits, the more you — and perhaps also your spouse — stand to lose. Here are the stakes.

7 Free Tools for Saving More Money at Amazon
7 Free Tools for Saving More Money at Amazon

Use these websites and other tools to save money — or earn extra cash — when shopping at Amazon.

8 Things I Always Buy at Costco
8 Things I Always Buy at Costco

From bacon to birthday cakes, here are my favorite deals at the popular warehouse store.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
17 Everyday Products Now Facing Shortages
17 Everyday Products Now Facing Shortages

Many goods we take for granted have become tough to find in 2021.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

This iconic dinnerware is prized for everyday use as well as reselling for profit.

20 Things That Are Actually Worth Stockpiling
20 Things That Are Actually Worth Stockpiling

You don’t need a year’s supply of toilet paper to survive an outbreak, but consider stocking up on these items.

9 of the Best Things to Do When You Retire
9 of the Best Things to Do When You Retire

You’ve waited all your life for this moment. Make the most of your retirement.

Medicare Will Not Cover These 6 Medical Costs
Medicare Will Not Cover These 6 Medical Costs

Don’t let these health care expenses catch you off guard in retirement.

Beware This Hidden Ingredient in Rotisserie Chicken
Beware This Hidden Ingredient in Rotisserie Chicken

Something foul may lurk in those delicious, ready-to-eat birds.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

3 Colors That Can Ruin Your Car’s Resale Value
3 Colors That Can Ruin Your Car’s Resale Value

Select the wrong color for your next car, and it could depreciate twice as fast as others.

9 Groups Who Should Brace for Higher Income Taxes
9 Groups Who Should Brace for Higher Income Taxes

Recent proposals would hike taxes for people with a wide range of incomes.

Never Buy These 10 Things on Amazon
Never Buy These 10 Things on Amazon

Just because you can purchase something on Amazon doesn’t mean that you should.

7 Big Purchases You Should Never Make
7 Big Purchases You Should Never Make

Sometimes a big-ticket purchase is nothing more than a big waste of money.

12 Deep Discounts Available on Amazon This Friday
12 Deep Discounts Available on Amazon This Friday

These items are steeply discounted — but the deals won’t last long.

8 of the Worst Things to Buy at Target
8 of the Worst Things to Buy at Target

No store can specialize in everything. For some purchases, it’s smart to shop elsewhere.

5 States With the Worst Health Care for Retirees
5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

8 Things You Should Be Buying at Thrift Stores
8 Things You Should Be Buying at Thrift Stores

For one expert, these secondhand bargains stand out from the rest.

20 Great Part-Time Jobs for Retirees
20 Great Part-Time Jobs for Retirees

Retirees can dial back the intensity of work while continuing to bring in a paycheck.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

11 Foods That Can Keep for Years
11 Foods That Can Keep for Years

These are some of the longest-lasting groceries you can buy.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.