Pay debts or save?


#1

#57. Dad, is it better to pay off debts or save first?
COAD: From a purely math point of view, it’s almost always better to pay off debts before putting money into savings. There is one exception. Contributing towards and emergency fund.
(The post above is part of my regular post on Instagram)

I know some people may have a different perspective. Thoughts?


#2

Some people do have a different perspective, but I’m not one of them. I firmly believe that getting rid of debts should be the top priority. Once those debts are gone, the ability to save a LOT of money instantly becomes easier. Your options open up significantly. To me, getting debts paid is absolutely #1.

That doesn’t necessarily mean NO saving, though, until debts are paid. Of course you don’t want your bank account at close to zero after everything gets paid. We all need a buffer as well as an emergency fund. Assuming that the emergency fund is already there, I’d probably do a 15/85% split between using the remaining money to save/pay off debt.

And this is especially true with shorter term debts - basically anything but a 30-year mortgage. But even with your mortgage…principle-only payments can make a huge dent, and having no mortgage to pay from month to month is absolutely amazeballz.


#3

I totally agree with this. Saving is like a muscle or a skill - you have to put in practice to build it up. Even just saving $5/month at first while you viciously attack debts can help to build up that “savings muscle” so it becomes a habit, and you carry it on once the debts are paid off.


#4

I think there are a few other exceptions, but really it comes down to whatever you’re comfy with.

Debt is the great wealth killer and should be limited from your life ASAP. Some of the other exceptions I’d make are:

  1. Never turn down free money via a 401k
  2. A good ESPP is also like free money from your employer and should be taken advantage of if you can
  3. I’d also save (invest) money over paying off a low interest loan
  4. Personally I’m not paying off my student loan because the rate is so low and should I die early, the loan is forgiven.

In those last two examples, saved/invested money can grow faster than it costs me to service the debts. So mathematically is makes sense to save & invest over paying off debt.


#5

Some debt is good debt, you can subtract mortgage/HELOC/student loan interest from your taxes. My rule of thumb is this, it you can use the money to make a higher % return than the amount of interest you are paying on the debt in the same time frame then it is OK to float out the debt. Play with the numbers.


#6

This is an eternal question in the PF community.

I’m in the same boat as @OthalaFehu. I look at the math behind it. If the interest rate on your loan(s) is less than typical market returns, invest the money.


#7

I think it depends on your situation (doesn’t it always?).

If you’ve got a lot of potential liabilities in your life (an old vehicle, old pets, sick parents who live far away, etc…), then I think an emergency fund needs to be a priority before accelerating your debt payoff.

If you’ve got few liabilities (no partners/kids, secure job, good health, etc…) then I think it’s fine to get by with a minimal amount in your emergency fund and focus on paying off debt faster first.

I’m working my way out of almost $100k of debt, but I’ve been focused on building up my emergency fund for a while. I’m glad I did too - I lost my job right before Christmas, and I just had to take my cat in this week for an emergency $3,500 vet visit.

If I’d have focused on paying off debt rather than building up a savings cushion (even if it wasn’t as large as I would have liked), I’d be totally screwed right now, potentially with a dead cat as well.


#8

From my perspective paying debt on time is most important rather than save it. However a successful business person is that one who manage the ration between both of them.

Not for the growth of any nation, for growth of any citizen too it is must required that citizen of that nation pay their debts. On the other hands, for a particular person it is necessary to save their debts but legally, that one could save filing an income tax return.

One should be aware if how to manage the debts. As you are well known that your payment history clarify either you are eligible for next debts or not. As not paying off your debts on time also affects your credit score.


#9

Although many might argue that the math says you should invest rather than pay low-interest debts, I like to do both at the same time if possible. I don’t like having debt, and there is a psychological boost to paying it off. Plus, you’re saving (possibly thousands) in interest when you pay extra toward the principle. However, you shouldn’t neglect saving for an emergency fund and retirement, even if it’s just a little bit. I think the best thing to do is find out what you can afford to do a month, and then split that between saving and paying off debt.


#10

I also don’t like having debt and try to pay it off first especially if the interest rate is high. However, I also prefer to have some emergency savings. Having a small $1,000 emergency fund that can cover unexpected expenses like car repairs, medical emergencies, etc. reduces stress. I don’t decide which to pay first, but do the payments at a time. I split the amount I spend on debt and savings each month.


#11

Paying debt is always better than save. saving does not mean if you are in debt.

  • paying debt increases your trust and self respect among your borrowers

  • mental relief

However you can save if your saving idea can help you to pay your debt faster.

you can also use LAP or debt consolidation loan mortgage to manage your debts.


#12

If you are in debt then your savings won’t be counted as savings. but still both should perform simultaneously. don’t go extream any one