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
7 Surprising Ways Retirees Waste Their Savings
7 Surprising Ways Retirees Waste Their Savings

You can make your retirement money last a lot longer by avoiding these costly mistakes

The 3 Biggest Regrets of Retirees — and How to Avoid Them
The 3 Biggest Regrets of Retirees — and How to Avoid Them

Rescuing a retirement from regret starts with these steps well before it’s time to quit working.

10 Purchases You Should Not Put on a Credit Card
10 Purchases You Should Not Put on a Credit Card

Credit cards offer many conveniences and protections, but sometimes it’s simply smarter to keep the plastic tucked away.

9 Indestructible Products That Are Worth the Price
9 Indestructible Products That Are Worth the Price

If you’re willing to pay a little more for these products, you may never have to shop for another again.

3 Reasons You Can’t Rely on Medicare Alone
3 Reasons You Can’t Rely on Medicare Alone

Counting on Medicare to cover health care costs can jeopardize your retirement plans.

View this page without ads

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

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

9 Deep Discounts Available on Amazon This Friday
9 Deep Discounts Available on Amazon This Friday

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

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.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

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 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

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.