Saving Money Vs. Paying Off Debt: The Personal Finance Conundrum

By Todd Kunsman

Saving Money

Published on

Saving money vs. paying off debt might be one of the most common personal finance debates. Least, I think it is and continues to find people on different sides.

For those just getting started and trying to figure out your financial path, it can be confusing with what to do or where to focus your time.

A few years back, I also ran into this dilemma. I researched, ran numbers, but still was truly indecisive as to what would take priority.

And you’ll see many experts choose one over the other. You’ll also read stories of others in the media or bloggers who chose one path over the other too.

For me, saving money vs. paying off debt can be a finance conundrum to those just getting started.

Saving Money Vs. Paying Off Debt

If you look at the math, see the interest on your debt, you’d generally lean towards paying off debt has your main goal. Right?

But pending your financial goals and current situation, it’s not always as simple as that.

In 2014 as a personal finance newb, I was looking at some student loan debt, car debt, credit card debt, but also had very little save and not much in retirement either.

After searching what I wanted to do and reading, I still found myself arguing internally of which is better: saving money or paying off debt.

The research explained the math and gave some great life examples. But even with that information, I still could not make a definite decision.

Chalk it up indecisiveness or financial ignorance still, but I was afraid I’d make the wrong decision if I went down one specific path over the other.

This is why I’m calling this a debate, a finance conundrum, or a confusing and difficult problem to solve.

Hopefully, you aren’t thinking I’m being over dramatic. You may even be yelling,

C’mon look at the data and math of your situation!”

For me specifically at the time, this was a battle regardless. A bit further down, I’ll share my choice and why.

When Should You Choose Saving Before Paying Off Debt?

20% of Americans don’t save any of their annual income at all and even those who do save aren’t putting away a lot. (CNBC)

One of the top reasons to prioritize saving money before paying off debt is to build an emergency fund.  

This can be important if you have little to nothing saved as you need some buffer for emergencies or other unexpected expenses. Plus, it helps relieve you of some money stress.

Also, if you’re somewhat lucky with your current debt, the interest rates on those loans might be pretty low. If you aren’t getting wrecked by the rates, socking this money away first until you have six months or so of expenses saved might be a great choice.

Lastly, if you have 401k options at your company you want to take advantage of that as well. Meaning you want to contribute money towards your retirement.

A lot of times companies will offer a company match up to a certain percent or even offer profit sharing. Factor in compound interest on your returns and you have a nice chunk of cash working for you.

By putting investing or retirement off, you can miss those contributions, compound interest, and effectively lose time from your money which will have to work harder later.

When Should You Pay Off Debt Before Saving?

Total revolving consumer debt was $1.039 trillion in 2018. (Source)

Besides student loan debt, consumer debt can also be a killer. Credit card interest rates can be crazy high.

My Visa for example is at like 23% interest rate! Imagine carrying thousands and thousands on this card, I’d be just giving extra money away!

Plus, when your interest rates are double digits, you won’t beat those in savings interest and highly unlikely you will in the stock market for your retirement investments.

Essentially, the interest on your debt is higher than returns you’re likely to earn by investing. The higher the interest on debt, the less it makes sense to focus on investing because your returns still won’t be even or generate significant value.

Another great reason to pay off debt early, is it frees up your income to saving and invest faster. I was paying roughly $321/month for my car plus another $312/month to student loans. That’s over $630 per month, and over $7,500 per year.

This money could have gone to savings and/or retirement investments. I’m not even going to include the compound interest numbers on that being invested because it will make me sad.

So again, another reason I struggled with that to do!

Balancing Both

The last option you have is pretty much just treating each equally. This is exactly what I chose to do after some back and forth with myself for weeks.

I also think it is potentially a more common choice, however I have no real solid data to back that up.

Was it the right decision?

And there was part two of the finance conundrum for me. In the last two years, I’m happy with my decisions but from 2014-2016, I still questioned if what I was doing was right.

At the time of this internal struggle, I had roughly $18,000+ in student debt left and $13,000+ on my car loan. Additionally, I remember around this time I wasn’t carrying any credit card debt (finally).

Looking at the loan breakdowns for the student loans and car, my highest interest rate was 6%. After my infatuation with investing and reading finance books, I realized the potential of saving and investing plus compound interest.

I decided that I would continue to pay the recurring minimum balance each month, increase my savings rate, and make more money. As I would make more money, I would use that to make an extra loan payment every now and then, as well as increase my savings rate once again.

Once I had built a good savings, I paid off the remaining car loan debt in 2017. That was $320 a month payment with a 6% interest rate (my student loans are all in the 4-5.5% range). That money back, then helped me increase my savings rate again.

So after those few years, I have over $70,000 saved and invested (at the time of writing this), with about $4,000 in student debt remaining.

I’ve realized if I focused on debt, I may have paid it off and paid less interest, but I would miss years of stacking money away and compound interest.

Because of all my saving, I also was able to travel and experience some awesome trips that I would not have been able to afford to do.

So did I do the right thing? Mathematically and to you, maybe not. Too me, I’ve finally come to peace with my choices and happy with where my finances are.

Final Thoughts

One of the challenges you will probably face with your personal finances is saving money vs. paying off debt. Additionally, there is plenty of information out there that swear by one side of that over the other.

What is one really to do when there does not seem to be a clear winner?

Well, there are positives and negatives to choosing one more over the other. Ultimately the decision depends on your unique financial goals. You may end up like me and choose to balance bother equally.

Had I not, 2017 to present I would be playing catch up to save money and miss out on years of compound interest and returns, which are continuing to grow.

Hopefully the above gave you some insight into my decisions (whether right or wrong) and helps guide to your own choices.

Either way, depending on what you focus on, you’re taking steps to have a financial win in someway.