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.