Why This Choice Matters

A 2023 Bankrate survey shows nearly half of Americans worry more about debt than their emergency savings. It’s a tug-of-war between stress over bills and stress over having no safety net.

High-interest debt can grow quickly—$1,000 today might feel like $5,000 tomorrow if ignored. But zero savings leaves you vulnerable to life’s surprises, like unexpected car repairs, forcing you back into borrowing. The key is balancing risk and opportunity cost.

The Case for Paying Off Debt First

If your debt has sky-high interest rates—credit cards average 24.7% in 2024—it’s like burning money. For example, a $5,000 balance could cost you $1,200 annually in interest. Pay that off first to save cash for real needs.

Take Sarah from The Penny Hoarder: she wiped out $15,000 of credit card debt using the debt avalanche method. In 18 months, she was debt-free and saving $300 a month in interest.

Beyond savings, clearing debt boosts mental health. According to the National Endowment for Financial Education, 70% of people feel better after paying off significant debt. Financial expert Suze Orman calls debt “a thief of your future.” Less debt means less stress and better sleep.

To start:

• List all debts and interest rates.
• Choose a payoff method: avalanche (highest interest first) or snowball (smallest balance first).
• Cut unnecessary expenses.
• Consider consolidating debt if rates are lower.

But what if your savings are zero?

The Argument for Saving Money First

Savings might feel like contrived broccoli, but having an emergency fund is essential.

Experts recommend 3–6 months of living expenses saved because life throws curveballs. The Federal Reserve reports 25% of Americans have no emergency funds, leaving them financially exposed.

Consider Mike, a teacher who built a $1,000 emergency fund before focusing on student loans. When his car broke down, he avoided new debt by paying in full.

Plus, starting to save early lets compound interest work its magic. Invest $200 monthly at 4%, and in 10 years, you could have $25,000. Warren Buffett advises, “Do not save what is left after spending, but spend what is left after saving.”

Saving first is wise if:

• You have low-interest debt (under 5%).
• Your income is steady.
• You currently have no savings.

To build savings:

• Automate deposits.
• Track progress with apps like YNAB.
• Maximize employer 401(k) matches.

But don’t let debt spiral unattended.

Finding the Right Balance

You don’t have to choose one path exclusively. A hybrid approach works well.

Using the 50/30/20 budgeting rule, allocate 20% towards both savings and debt repayment. For instance, split that half and half. Once your emergency fund hits $1,000, increase debt payments.

NerdWallet notes that people juggling both pay down debt 15% faster while growing savings.

Emma, a freelance writer, saved $500 for emergencies and then tackled $8,000 of debt with the debt snowball. Two years later, she’s debt-free with a $5,000 safety net.

Helpful tools include apps like Debt Payoff Planner and Acorns, financial advisors, and communities such as Reddit’s r/personalfinance.

Pitfalls to Avoid

• Ignoring high-interest rates.
• Over-saving in low-interest accounts.
• Lifestyle inflation after small savings gains.

Conclusion

Should you save first or pay debt first? It depends on your situation. High-interest debt is an urgent fire to extinguish, while savings act as a fire extinguisher for emergencies. Start with budgeting, set small goals like saving $1,000 or paying off one debt, and build your financial confidence.

Ready to take control? Use NerdWallet’s calculators and balance your budget like the financial acrobat you are. Here’s to fewer pandas throwing popcorn on your tightrope!

Now, go make those dollars dance! 💸 Get A Free Money Map Guide Here!🗺️