Should I Save My Money or Pay Off Debt?

by Maggie McCormick, Demand Media

    Having money in a savings account offers you security, but it's difficult to know whether it's better to have money in that account or to use it to pay off debts. With high interest rates on credit debt and low interest rates on savings accounts, the answer may seem like simple math -- paying off your debt is the smarter choice. The truth is a bit more complex than that.

    An Emergency Fund

    Bankrate.com's Marcia Passos Duffy reports that in an economy when credit is tight, it's smart to have an emergency fund. You never know when you might lose your job or have an unexpected expense. If you've been paying off your debt rather than saving, these types of expenses can just put you back into debt. Try to save up an emergency fund of at least six months of basic living expenses. Then you'll have something to dip into besides your stack of credit cards when times are tough.

    Retirement Savings

    The idea behind your retirement savings is that it's invested for the long term so that it has a better chance to grow. Small amounts of money you save when you are young turn into much larger amounts of money as your portfolio grows over time. Put some money in your retirement savings accounts before you pay off your debt. This is especially true if your employer makes a matching contribution.

    Debts to Pay

    When you do start paying off your debt, the first debts that you want to pay off are the ones with the highest interest rates. These are the ones that are costing you the most long-term. Though you must always pay the minimum balance due, on mortgage and student loans, paying these off can take a back seat to other debts, as they typically have lower interest rates.

    Saving and Paying Debt

    There's no reason why you have to focus on just one or the other. Though your finances may be tight, try to set aside even a little bit of money into your savings account. Use the rest of the money to pay off your debt. Once you've reached your savings goal, you can focus all of the money that you were paying toward savings into paying off your debt. After you've paid off the debt, you can start saving again.

    About the Author

    Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.