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Should You Pay Off Debt Now Or Save For The Future?

Matt Cardwell5-Minute Read
UPDATED: June 02, 2024


When you’re in debt, it can make sense to try to pay off your loans as soon as possible and be done with it. However, what happens after you’ve focused all of your finances on getting rid of debt? Do you have any savings? Would it make more sense to hold onto your debt a little longer and save up money instead?

This article will show you the benefits of both strategies, as well as how you can do a bit of both, and answer the question: Is it better to save your money or pay off your debt?

When You Should Pay Off Debt

Knowing what to prioritize can depend on your financial situation and what type of debt you have. Your debt can directly affect your finances in the following ways:

  • Interest rates: High-interest debt can cost you more the longer it stays with you. If you have a high interest rate on one or more debts, it may be best to pay those off sooner than later.
  • Credit score: Your credit score can be your key to taking out future loans, like a mortgage, and having too much outstanding debt can negatively impact your score. If your credit utilization is over 30%, paying off your debt should probably become your priority to get you a healthier credit score.
  • DTI ratio: Your debt-to-income (DTI) ratio refers to what percentage of your income goes toward paying down your debts. If you plan to one day take out a mortgage, or another type of loan, keeping your DTI ratio low can ensure you qualify for good interest rates down the line.

Being weighed down with debt can keep you from reaching your financial goals, such as buying a home, and saving for those goals can be much easier without debt looming over your shoulder. Making only the minimum payments every month may not do much to pay down your debt either if you’re continually charged high interest rates. If you decide you need to focus on paying off your debt, it’s important to make a plan of attack.

Consider some of your options below:

Choose A Debt Repayment Plan

There are two main debt repayment plans borrowers tend to choose from, each with their own approaches and strategies. If you have numerous high-interest debts, consider the avalanche method. Through this plan, a borrower will prioritize paying down their debt with the highest interest rates and work their way down to their lower-interest debt.

Alternatively, you could go with the snowball method, which has you taking on your lowest-balance debts first and working your way up. Some people may prefer the snowball method, as you can potentially pay off individual loans more quickly by targeting the lower balances. However, you’ll continue to be charged for your higher-interest loans while you pay off your lower-balance debt. If your high-interest debt also has the lowest balances, all the better.

Consolidate Your Debt

Debt consolidation involves taking your individual loans and combining them into a single balance for you to repay. Consolidation works for some because it can turn multiple monthly payments into just one, simplifying the repayment process, and possibly with a lower interest rate than before.

One way you can consolidate your debt is by taking out a personal loan. You can then use the funds to pay off all your outstanding debt. Over time, you’ll repay the loan according to the agreed-upon rates and terms set by your lender. Getting a personal loan with good rates will require a healthy credit score and a low DTI, so taking out another loan, even for consolidation purposes, might not be in your best interest if your credit isn’t in the best shape.

Another consolidation tactic is getting a balance transfer card. In a balance transfer, your collected credit card debt is moved over to a brand-new card. In some cases, your new credit card will offer a 0% APR promotional period, during which you can repay your balance without incurring any interest charges for a limited time. A promotional period typically lasts 12 – 18 months, and if you can’t pay off your whole balance by then, you’ll have to start paying your new card’s APR, which can be around 14% even with good credit.

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When You Should Save Money

Paying off debt can leave you more room to start saving up for your future, but you could be delaying your financial goals by 5 – 10 years if you wait until your debts are fully repaid.

The earlier you start saving, the more you can accumulate by the time you’ve paid off all your debts. Whether you’re saving for retirement down the road, or something more immediate like a down payment on a house, you should put a savings plan into action if you want to prioritize saving up.

Consider some or all of these saving strategies:

Build An Emergency Fund

An emergency fund can act as your safety net for any unplanned expenses that come your way. If you need emergency car repairs or owe a hefty medical bill, you can turn to this fund instead of taking on more debt.

Set Up A Retirement Fund

Starting your retirement savings too late can cost you valuable time, as well as money. Putting money into a 401(k) or an IRA can help build up funds so that you can retire when you plan to. You’ll typically want to put 15% of your annual gross income toward retirement in order to save enough for your future.

Take Advantage Of Employer Matching Contributions

If your employer offers it, don’t sleep on matching contributions toward your workplace retirement plan. A matching contribution is essentially free money, and you could miss out on thousands of dollars by not taking advantage of employer contributions. Even if you contribute the minimum amount needed to earn your employer’s match, you can still benefit from the additional savings.

How To Save While Paying Off Debt

It can take some careful planning, but you may be able to balance saving up while paying down your debts.

The first step is making a budget for yourself. Figure out how much income you can save each month then divide it between your savings and your debts, targeting your high-interest loans first. Once a debt is paid off, you can redirect that amount into your savings, as your budget has already accounted for that money.

Debt consolidation can help you manage your debt more easily, especially if you can get a lower interest rate. Consolidating high-interest debt like credit card debt can go a long way in saving you money that would otherwise go toward your interest. Additionally, refinancing a home loan or any student loans for a lower rate can save you in interest and let you put more toward your savings.

Final Thoughts

Figuring out where your money should go is an important part of managing your personal finances. Paying off debt is important, but so is saving for your future. If you can strike a healthy balance that can accomplish both saving money and debt management, then you may not have to choose between the two.

If debt consolidation sounds like the right move for you, apply for a personal loan with Rocket LoansSM and see what rates you may qualify for.

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Matt Cardwell

Matt Cardwell is Editor-in-Chief and leads the Rocket Publishing House at Rocket Mortgage. During his nearly 15 years with Rocket Mortgage, Matt has occupied a diverse array of Marketing leadership roles, including leading and growing the company’s early digital and internet marketing efforts; Vice President of Marketing; Director of Social Media and Director of Business Channel Strategy.