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Should I Save or Pay Off Debt?

Is it better to save cash or pay off debt? You have to strike a balance between the two.

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Updated July 4, 2025
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Edited by John Howard
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Written by Rachel Alulis
Here at MoneyFor, our goal is to help you make informed financial decisions. We are committed to accuracy and impartiality in all our content. It’s important to note that articles may reference products from our partners who compensate us. This influences which products we feature and their presentation on our site, not our evaluation.

Key takeaways

  • Balancing repaying debts while saving money is essential for long-term financial stability.
  • First, build a small emergency fund while prioritizing high-interest debts.
  • Find a debt payment method and savings strategy that works for you.

‘Is it better to pay off debt or save?’ is a question asked by countless Americans. The answer is, of course, neither saving money nor paying debts; it’s both.

Having money set aside can keep you from borrowing again to cover unplanned expenses. Paying debts – especially ones with high interest rates – will save you money and relieve stress. The key is figuring out how to start saving as you make debt payments.

Let’s go over how you can strike a balance.

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Insights on American debt and savings

American credit card balances reached $1.182 trillion in Q1 2025, according to the Federal Reserve Bank of New York.

The national average card debt among consumers with unpaid balances was $7,321 in Q1 2025. LendingTree

A May 2025 Federal Reserve study reported that 46% of Americans carried a balance on a credit card for at least one month in the past year.

Only 33% of Americans have more credit card debt than they do in emergency savings. Bankrate

63% of Americans are uncomfortable with their level of emergency savings.  Bankrate

Only 46% of Americans have enough emergency savings for three months of expenses, and 24% have no emergency savings at all. Bankrate

37% of U.S. adults dipped into their emergency savings in the past year. 80% used the money to cover essential expenses. Bankrate

34% of Americans surveyed by Motley Fool Money have a savings account with an APY of 4% or higher.

Is it better to save or pay off debt first?

Should you save money or pay off debt first? Both are essential for financial security, so how do you decide? There’s no one-size-fits-all answer. The key lies in striking a balance between the two.

Many financial experts recommend building a small emergency fund first and then prioritizing debt payoff. Having a safety net can provide you with emergency cash immediately, without the need to borrow. You won’t have to apply for a loan or swipe your card when unexpected expenses arise.

The amount of money you need depends on your personal situation. Some experts recommend starting with $500, while others suggest having three to six months’ worth of living expenses. Dave Ramsey, a renowned personal finance writer, recommends setting aside $1,000 before focusing on repaying what you owe.

On the other hand, if you have high-interest debts – anything with an APR over 15% – then it’s good to pay them off as soon as possible. Interest charges will eat up your monthly budget and significantly increase the amount you owe.

The ideal solution is to save and pay off accounts simultaneously.

OptionProsCon
Save firstAvoid more debt, have an emergency fund, and earn compound interestPay off debts more slowly, pay more in interest
Pay debt firstBorrow to cover unexpected expensesborrow to cover unexpected expenses

Save or pay debt – how to decide?

There are several factors to consider when deciding whether to focus your efforts on saving or paying off debts.

Interest rates

Start by comparing the interest rates on your debts to the potential earnings from your savings. If your debt carries high interest, which most credit cards do, it’s usually smarter to pay it off first. High interest can quickly erase any gains you’d earn from saving.

For example, LendingTree places the average credit card interest rate at 24.33% APR. According to the latest numbers from the Federal Reserve, the national average for savings accounts is only 0.38% annual percentage yield (APY). The best high-yield savings accounts offer APYs of up to 4.66%, according to NerdWallet. Even with a high-yield savings account, you will still be paying more in interest than you’re earning.

Debt management

Consider your overall debt load and how manageable your monthly payments are. If you’re struggling to keep up, focusing on debt repayment can help alleviate stress and improve your financial situation.

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Credit utilization

High credit card balances (those that exceed 30% of your limit) negatively impact your credit score. Paying off credit card debt can improve your credit utilization ratio and boost your score. A lower utilization rate can lead to better loan terms in the future.

Emergency fund

One of the key mistakes to avoid when paying off debt is neglecting to save altogether. Having at least a small emergency fund prevents you from relying on borrowing in a crisis. Being able to dip into your savings rather than swiping your credit card will help you avoid further debt.

You don’t have to start with a large amount. Ideally, you want to be able to cover a few months of living expenses. Figure out a manageable amount and save consistently.

Save for retirement or pay off debt

Paying what you owe is important, but so is saving for the future. Having a retirement account ensures long-term financial security. Starting early allows you to take advantage of compound interest, which can significantly grow your savings over time.

Allocate 10% to 15% of your pretax income to your retirement plan. If this is too much, try a smaller percentage; however, it’s essential to set aside something for your future.

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How to pay off debt quickly without sacrificing savings

Learning how to get out of credit card debt fast can help you regain control of your finances and start focusing on saving. Here are a few tips to help you pay bills efficiently.

Prioritize high-interest debt and overdue accounts

Focus on repaying debts with high interest rates. When you have a high APR, the interest charges can quickly accumulate. This is especially true with credit cards, as almost all come with high APRs and their interest compounds daily.

Paying off high-interest credit card debt should be a top priority. Try to pay more than the minimum each month. Making only the minimum payments means that most of your money goes towards interest, rather than reducing the principal. You will accumulate more interest and prolong the time it takes to pay off the balances.

One strategy for how to pay off debt with no money is negotiating with creditors for lower interest rates. Your provider may lower your rate or waive fees, making it easier to pay off balances.

It’s also good to bring delinquent accounts up to date. Past-due accounts harm your credit and result in additional fees and interest charges. Contact your creditors to discuss potential payment plans or hardship programs to make repayment easier.

Debts, such as a car loan or a mortgage, with a lower interest rate are less of a worry. In this case, you should make your monthly payments while focusing on savings.

Consolidate debts

Debt consolidation is a popular strategy that helps you pay what you owe effectively and ideally for less. It works by rolling multiple debts into one monthly payment at a lower interest rate. Using a personal loan to pay off credit card debt simplifies your bills and saves you money on interest. The lower monthly payments mean that you can repay debts while setting more money aside for savings.

There are several ways to do this:

  1. Personal loan: You can take out a debt consolidation loan and use the money to repay creditors. These loans typically have lower interest rates and set repayment terms.
  2. Balance transfer credit card: Apply for a card with a low or 0% introductory APR on balance transfers. Be sure to pay the credit card balance in full before the introductory period ends.

Both methods come with fees and require good to excellent credit to secure a lower APR. You can find debt consolidation loans for bad credit, but check that you will save money since the interest rate will be higher.

A third consolidation option is a debt management plan (DMP) from a nonprofit credit counseling agency. DMPs roll all your debts into one without requiring you to take out a loan or balance transfer card. The credit counseling agency will also negotiate with creditors to lower your interest rate or waive fees. The result is a single, affordable monthly payment and a set timeframe to be debt-free.

Credit counseling agencies offer more than DMPs; they offer free financial education resources. Their certified counselors can also help you create a realistic budget and find money for savings.

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Additional debt relief methods

The best debt relief options depend on your financial situation. Consolidation may be suitable for you, or you may be able to pay off your debts on your own.

DIY strategies include the debt snowball and avalanche methods. With the snowball method, you pay off the smallest amounts first, all while making the minimum payments on the rest. The debt avalanche prioritizes the account with the highest interest rate first. Paying off high-interest accounts first can save you thousands, while the snowball method builds motivation.

If your debt is overwhelming and you cannot pay it in full, negotiating a settlement may be a viable solution. Debt settlement is when you or a third party negotiate a lump sum payment that is less than what you owe.

While paying less sounds great, settling accounts will hurt your credit score, have tax implications, and the debt settlement company will charge a fee.

Bankruptcy is a third option, but it is usually a last resort when all other options have failed. It can be a financial reset, but it will severely damage your credit score.

Always consider the debt relief programs’ pros and cons before you start. Some debt relief strategies, like settlement, come with serious risks.

Should I empty my savings to pay off debt?

When you want to speed up the process of paying off debts, it’s tempting to empty your savings. Using your savings is generally a bad idea since you need that money for financial security. Next time an emergency comes up and you don’t have savings, you will have to borrow. You can easily find yourself in a cycle of debt.

Similarly, you may ask Can I cancel my 401k and cash out while still employed? Cashing out your 401(k) is generally not allowed and is a bad idea. You will likely have to pay taxes and early withdrawal penalties on the money. You will deplete your retirement savings and lose out on compounding interest.

Why it’s worth repaying debts

There are numerous benefits of paying off debt. You will reduce your stress levels. You will have fewer bills to worry about. You will have more cash flow. The primary benefit is, of course, that you’ll pay less interest. Saving money on interest is especially true with credit cards whose interest compounds daily.

Paying off credit card debt will also lower your utilization rate and increase your credit score. It is one of the best things you can do for your financial health.

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Can I still save while paying off debt?

You can save while working to pay off debts quickly, but it will be a little harder. A few tried and true methods include:

  • Set a realistic goal
  • Pay yourself first
  • Try the 50/30/20 budget
  • Open a high-yield savings account

Setting a realistic goal will help keep you motivated and not discouraged. Set aside what you can each month, even if it’s only $10. Don’t shoot for the stars at first. The key is to be consistent and to save.

Pay yourself first

Whenever you’re trying to save, a good trick is to pay yourself first. Paying yourself first means setting aside a portion of your paycheck into savings as soon as you receive it. Many employers let you split your direct deposit between your savings and checking accounts. You never see the money, and so you are never tempted to spend it. Automating your savings helps ensure that you consistently save a portion of your income without thinking about it.

What is the 50-30-20 rule?

The 50/30/20 budget is when you break your gross income down into categories.

  • 50% goes towards basic expenses, including housing, groceries, and utilities.
  • 30% goes to whatever you want.
  • 20% goes towards debt and savings.

This spending plan ensures that you live within your means, have some fun money to spend as you like, and still save. It’s not for everyone, but it is a good place to start.

Open a high-yield savings account

Now that you’re automatically saving, it’s time to grow what you have. Open a high-yield savings account that offers an APY above 3%. The high APY will help your money grow faster, allowing you to earn more interest.

Benefit from your employer’s 401(k) match program

Find out if your employer offers a 401(k) matching contribution. A 401(k) employer match is essentially free money that can boost your individual retirement savings.

For instance, if your employer matches up to 5% of your salary, contributing at least that amount ensures you receive the full match. This can significantly enhance your retirement fund over time. Make sure to contribute the required amount so you can take advantage of the extra cash.

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Pay off debt or save? Find a balance

Is paying off debt worth it? Paying off debt is always worth it. You can save thousands, relieve stress, and improve your credit score. Your focus should be on paying off high-interest debt first, as its cost can add up quickly and outweigh the benefits of saving.

However, it’s vital that you also have emergency savings so you don’t have to borrow money. Putting off retirement savings for too long also means that you will lose out on earning interest. It’s a lot to think about.

In the end, you have to strike a balance between the two. Pay your dues, but don’t forget to save too.

Go to MoneyFor for more tips and tricks.

Frequently asked questions

1. How could you make sure that you are paying yourself first regularly and building up your savings?

Paying yourself first will build your savings. The best strategy is to have payroll send a percentage of your direct deposit to your savings account. If this is not an option, your bank may allow you to automatically transfer a set amount of money from your checking to your savings account each month. Set up the automatic transfer for the day after you are paid.

2. Is it smart to pay off all debt before beginning to save?

You should start saving as you are paying off debt. Having an emergency fund means you do not have to borrow money for urgent expenses. Saving for retirement early lets you take advantage of compound interest so that you will have more in savings when you retire.

3. How much should I save?

Aim to save at least three to six months’ worth of living expenses. This amount provides a safety net for unexpected costs, such as medical bills or job loss. Saving for retirement should not be overlooked. Ideally, you’ll put 10% to 15% of your income into savings. If you can’t manage 10%, start with a lower percentage and build your way up.

4. How much debt should I pay off each month?

How much you should pay creditors depends on your income and the type of debt you have. If you’re dealing with credit card debt, pay as much as possible each month to reduce interest charges. A general rule of thumb is to put 20% of your income towards debt and savings.

5. Should I clear all my debts in one go or gradually over time?

If you can pay off all your debts at once, do so. You will save money on interest and then can focus on your savings.

6. How much should I have in savings before paying off debts?

The amount of money you should have in savings depends on your cost of living and interest rates. Most financial experts recommend having at least three months of living expenses saved. If you have high-interest debt, you may be better off following Dave Ramsey’s advice and saving $1,000 before prioritizing debts.

7. Should I take money out of my savings to pay off credit card debt?

Using some savings to pay down high-interest credit card debt can be beneficial, as it reduces interest costs. Do not use all your savings as you’ll end up having to borrow again.

Bottom line

The eternal question of whether it’s better to save or pay creditors does not have an easy answer. You need to consider your full financial picture. Do you have lots of high-interest accounts? Do you have any money set aside in an emergency fund? Have you started saving for retirement? All these questions can be overwhelming. Take it one step at a time.

Start by paying high-interest bills and setting aside a small amount of money in a savings account with a high APY. As you reduce what you owe, put more money into savings.

The idea is to strike a balance. Saving money sets up a buffer so that you don’t have to take out a loan or use a credit card next time an unexpected expense pops up. With a balanced approach, you can pay everything you owe and have savings.

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41. MyPay is only offered in select states
42. To be eligible for MyPay, you must receive qualifying direct deposits to your Chime Checking Account as set forth in the MyPay Agreement. A qualifying direct deposit is a deposit from an employer, payroll provider, gig economy payer, government benefits payer, or other permitted source of income by Automated Clearing House (“ACH”) or Original Credit Transaction (“OCT”). Your MyPay Credit Limit and Maximum Available Advance may change at any time. MyPay is a line of credit and available limits are based on estimated income and risk-based criteria. Eligible members may be offered a $20 – $500 Credit Limit per pay period. Your Credit Limit and Maximum Available Advance will be displayed to you within the Chime app. MyPay is currently only available to eligible Chime members in certain states. Other restrictions may apply.
43. Not affiliated with Empower Annuity Insurance Company of America (www.empower.com).                              Not everyone will qualify. Offers range from $10-$300 for first-time customers; $10-$400 for all others. Offers are based on our eligibility requirements and can go up with on-time payments. In Feb 2025, the average offer was $95 for first-time customers; $187 for all others. Instant delivery is optional—see fees in Empower’s Terms.                              Empower offers a 14-day trial for first-time customers followed by an auto-recurring $8/month subscription fee. Cancel anytime.
* EarnIn is not available for Connecticut residents
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About the author

Author Rachel Alulis Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor's credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor's degree in journalism and an MBA.

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