Skip to main content

Should you pay off debt or save first?

What we'll cover

  • Paying off debt vs. saving

  • Savings strategies with buckets

  • Debt reduction and saving simultaneously

One of the most common financial dilemmas individuals face is whether to pay off debt or save money. Each action can significantly impact your financial well-being and future goals. While there is no one-size-fits-all answer to this question, understanding the factors involved can help you make wise and informed choices.

Debt first or saving first?

Prioritizing debt repayment before saving is a prudent financial strategy that can lay the groundwork for long-term financial stability. This approach acknowledges the urgency of addressing existing debts, particularly high-interest ones, as they can be a substantial drain on your financial resources.

By allocating your financial resources toward paying off these debts and using a structured  debt management plan , you reduce the burden of interest payments. Credit card debt and high-interest loans can accumulate interest at rates that far exceed what you can earn in your savings account. Debt reduction not only frees up your financial resources but also alleviates the emotional stress associated with financial obligations, providing peace of mind. Moreover, it can improve your  credit score , leading to better loan terms and financial opportunities in the future.

Once you've substantially reduced your debts, you can then shift your focus to savings with a more significant portion of your income, enabling you to  build a robust emergency fund , invest for retirement and pursue other financial goals with a newfound sense of security. When you have fewer financial obligations, you have more control over your money. This can relieve stress and provides a sense of financial freedom.

Smart money moves when saving

While the conventional wisdom often leans toward swiftly eradicating debt, the idea of directing your resources toward savings first has gained traction among those seeking to secure their financial future. The question that arises is whether this method is a smart financial move.

One of the key advantages of saving before paying off debt is the concept of building a financial safety net. An emergency fund, for example, serves as a financial cushion, shielding you from unexpected expenses, job loss or medical emergencies. Without a healthy savings buffer, individuals may find themselves resorting to taking on more debt when faced with unforeseen financial challenges, potentially undoing the progress made in debt repayment.

Savings can also be viewed as an investment in future financial stability. While it may seem counterintuitive to set money aside while carrying debt, this approach can make sense if the interest rates on your debts are relatively low.

Saving while managing debt

Saving and paying off debt simultaneously is not only possible but often a common practice. This approach recognizes the multifaceted nature of personal finance. Opening an Ally Bank  Savings Account  can help you categorize your savings goals into distinct buckets  with one account for different financial goals. This can help you stay on track and you can chip away at your debt at the same time.

While paying off debt remains essential, the bucket feature offers a practical way to ensure that you're still building your financial security and working toward your future goals.

Balancing it all out

Whatever choice you make when it comes to paying your debt off first or saving, the key is finding the right balance that supports your goals. Make sure you aren't neglecting your own needs so you don't get burned out or frustrated, potentially derailing your plans. Managing your finances isn't just about restrictions, but also achieving a well-rounded life.

Explore more

Save Spend Budget

Read next

Image of a woman working on her laptop from her couch How does a savings account work?

Aug. 22, 2023  •  2 min read

Smiling mother holding daughters hands while standing in river. How to save for multiple goals

May 25, 2023  •  5 min read

Money solutions and strategies sent straight to your inbox.

Tips and tools to help you build your best financial future.

Let's Connect