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Should I Build Savings or Pay Off Debt?

January 2, 2023

It’s the start of a new year and a lot of people are thinking about their money. 

Let’s start with a hypothetical situation. In this scenario, let’s pretend you have no savings to speak of and $20,000 in debt. You are trying to decide whether to focus on:

  1. paying off debt, or 
  2. building your savings

Both worthy options that will improve your financial life, so bravo on that! 

But deciding which one can be hard.

I know, because choosing between these two options consumed a lot of my energy in my 20s and early 30s. I was mired in debt and had a rollercoaster of a savings account which averaged out at about Not Much. 

As we talk about the question of whether to put extra money toward debt or savings, there are a couple things contributing to the stress of this decision.

  1. You’re putting a lot of pressure on yourself to know the exact right answer. You’re assuming there is one right answer and the other is wrong.
  2. You’re expecting yourself to know what’s around the corner and try to anticipate everything that might sway you one way or the other.

So, just a friendly reminder before continuing: you thankfully are not expected to anticipate all eventualities, and one of these choices isn’t bad and the other is good. Phew!

Until you decide, you might be trying to do both. And that doesn’t feel very good. I know how? Well, because it was very much my approach all through my 20s and into my 30s. Any guesses on how that went? Poorly. 

Of course I didn’t intend to do both poorly. It’s just what happens when your focus and motivation are split between 2 competing goals. Waffling between 2 things is not fun or productive.

But the moment you commit yourself definitively, you can get all your energy behind a single thing and make progress.

Back to the practical matter at hand: 

My answer at this point, after working with dozens of individuals to improve their money approaches: whichever one you’ll go all in on. 

But there’s more to the answer, so let’s expound on it shall we?

Scenario 1: You choose to focus on savings.

Great! You picked one! 

A recommendation to consider:

If you decide to focus on building your savings while paying only minimum payments on debt, decide how much you need to save before you shift your focus to debt-payoff. 

If you don’t, you’ll never reach the amount at which you feel good making the switch in focus. Is it $3,000? $13,000? $30,000? 

There’s a world of difference between $3,000 and $30,000. $27,000 difference to be exact. 

And if $3,000 in savings is the amount which allows you to feel comfortable enough to shift your efforts to paying off debt, that is really good to know so you don’t spin on your way to a vague goal of “more money in savings.”

Scenario 2: You choose to focus on debt payoff.

Also great! You picked one!

Recommendations to consider:

  1. Stop using credit cards or getting into debt. That is a healthy first priority. 
  2. A modest amount in savings to serve as a buffer between you and life helps immensely. This will almost function as your new credit card. 
  3. Pick which debt you are going to focus on first, then pay minimum amounts on the rest. Some recommend paying off your highest interest rate card first, and you may choose this approach. I for one really appreciated the momentum I gained by quickly paying off my smallest debt and freeing up that monthly payment. What you want to avoid is aimlessly trying to pay extra on multiple debts. 

Given these things to consider, which are you going to pick? And why?

Only you know your full financial situation and the above is not a full discussion of the matter, but these recommendations hopefully give you a starting point for making your decision.

I think you’ll be surprised at how good it feels to choose and commit and here’s why:

“The moment one definitely commits oneself, then providence moves too. All sorts of things occur to help one that would never otherwise have occurred… Unforeseen incidents, meetings, and material assistance, which no man could have dreamed would have come his way.” Johann Wolfgang von Goethe

One final note:

Whichever you decide, it’s critical to have surfaced all your true costs of living and create a budget system you can love. This way you are working with realistic numbers and have a system that can help you keep it all organized.

For surfacing all your expenses, take a look at the below blog post. For help tuning up your budget and learning what's important in it, check out The Budget Tune-Up mini course.

Happy choosing and happy progress-making!

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