Sep 14, 2023

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Pay off debt or save for an emergency? It’s a tough balancing act. Both are smart money moves that could help you achieve financial wellness. But the right move depends on your personal circumstances and what’s going on in your life.

In reality, you may not have to choose. You could pay off high-interest debt and save money at the same time. This article will help you understand what steps you can take toward becoming debt-free and help you develop strategies to grow your savings for whatever goal you’ve set for yourself.

Table of contents

First things first: Build an emergency savings fund

Before you start deciding whether to pay down debt or build up your savings, you need to protect yourself with emergency savings.

An emergency savings fund could help you avoid going into debt if you have to deal with unexpected expenses. What if your car suddenly needs major repairs? Or if you're hurt in an accident, how will you pay the medical expenses? Where would you get the money to get by if you lost your job? These are just some examples of why you might need an emergency fund.

If your emergency fund hasn't been your top priority, you're not alone. According to the Federal Reserve, 30% of adults indicated they could not cover three months of expenses by any means.1 Without emergency savings, you may be forced to tap credit cards or other high-interest loans. That could increase your debt load and undermine the financial security you’re working hard to achieve.

Experts recommend savings of three to six months of living expenses, depending on your personal situation. For example, if you’re self-employed, have a family with kids, or rely on just one income to make ends meet, you might shoot for an emergency fund at the higher end of the range. But if you’re retired with a pension and live well below your means, a smaller emergency cushion might be enough.

Don’t worry if you don’t have three to six months of savings right now. Focus on taking small steps to building up whatever savings you can. Some savings is better than none and can put you on better financial footing in case of unanticipated expenses.

Why is it important to pay down debt?

After you’ve tackled your emergency savings, you can start getting more aggressive about paying off your debt. Even if you're keeping up with monthly payments, chipping away at higher-interest debt can go a long way toward improving your financial health.

Here’s why:

  • Having manageable debt lets you focus on long-term plan
  • With lower-interest debt, you could free up extra money to jump-start your savings so you can reach other goals, like retirement, a down payment on a home, college for your children, a vacation, and many others.
  • Maintaining a strong payment history is good for your credit profile. It may boost your ability to borrow when you need to.

How can I build my savings?

Once you’ve made a commitment to pay off debt and save for the things that matter to you, you’ll want an easy way to budget for those goals. Consider using the 50/30/20 rule to simplify your budgeting and help you start saving. Paying off debt and saving are built into the system. Here’s how it works:

  • Spend 50% of your budget on necessities like rent, groceries, and utilities.
  • Direct 20% of your budget toward savings goals and paying down debt.
  • Spend the remaining 30% any way you like.

When it comes to saving, don’t forget to take advantage of your company’s 401(k) retirement plan, if you have one, to save in a tax-friendly way. You’ll want to contribute enough to maximize any matching funds your employer offers; that’s free money and it’s a good idea to take advantage of it. If you have any questions, be sure to consult a tax professional or your company’s benefits counselor.

You can look at other approaches to building your savings, like automating saving or taking on some freelance work to bring in additional income. Whatever you choose, think about sharing your goals with a friend and asking them to help you stick to the plan.

How can you create a strategy to pay down debt?

Your individual debt repayment strategy depends on the loans you have. You might have higher-interest credit card debt, medical debt, student loans, or a mortgage.

First, identify all of your debt and look at your balance and the interest rates you’re paying. You can then decide which debt to pay off first. Once you have all that information in one place, consider whether you want to follow the snowball or the avalanche approach to debt. With the first approach, you handle your debt with the smaller balances first. The other has you focus on your highest-interest debt first. The best method really depends on your personal situation.

For example, if you have a payday loan, you might want to tackle that one first. While typical payday loans involve borrowing small amounts, the steep interest and penalties can add up fast, so it may benefit you to get rid of it as quickly as you can.

Another approach may be to consolidate your higher-interest debt with a personal loan. You might be able to get a lower interest rate, which could create more breathing room in your budget and allow you to grow your savings. In fact, 88% of surveyed customers who consolidated debt told us taking out a Discover personal loan reduced their stress.*

One Discover customer noted, "The best choice I ever made was going to Discover for a Debt Consolidation Loan- I don’t have to think about a thing. It took such a stress off of me- I know I still have some debt, but not the high interest rates like the other guys.”

Saving as little as $50 or $100 a month  may help put you on a path toward financial security. What’s more, debt consolidation could give you a bit more control over your budget. Instead of multiple payments with balances that might vary from month to month, you will have one set regular monthly payment. And it is easier to plan for a fixed expense.

Consider an example in which you are paying off multiple creditors using credit cards versus a single loan from Discover Personal Loans. Imagine you have a FICO score of 720, a $5,000 balance on one card with a 19.99% APR, a $4,000 balance on a card with a 22.99% APR, and a $3,000 balance on a card with a 23.99% APR and were paying $100 each month on each card. If you apply and are approved for a Discover personal loan to consolidate that debt, and get an estimated 19.99% APR you could save nearly $2,000 and pay off your debt six months sooner, depending on the terms of your offer.**

Balance paying off debt and saving for your goals

It’s easy to get overwhelmed by debt, especially if what you owe does not leave much room in your budget for daily expenses. So how can you decide what to do? The answer is different for everyone.

If debt has you stressed, then paying it down might be your top priority. Chipping away at your debt consistently and watching the balance decrease can be a big stress reliever. Once your debt feels more manageable, you may be able to rework your budget to prioritize savings.

Ideally, you should try to design a budget where you can save money and pay off debt at the same time. If your debts are manageable and you’ve shored up your emergency savings, then you can work on saving for other things that are important to you.

In the end, having a plan and consistently sticking to it is the best way to pay down your debt and build your savings.

Interested in learning what you might save in interest with a personal loan for debt consolidation? Use our calculator to estimate your savings with no impact to your credit score.

Estimate Debt Consolidation Savings

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.


All figures are from an online customer survey conducted August 19 to September 6, 2022. A total of 665 Discover personal loan debt consolidation customers were interviewed about their most recent Discover personal loan. All results @ a 95% confidence level. Respondents opened their personal loan between January and June 2022 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’.

**This estimate maintains  a current $300 monthly payment for a 67-month term at 19.99% APR with a total loan of $19,932. Rates are calculated based on Discover application data as of 07/18/2023.