Man and woman look at laptop and bills to determine whether to pay off debts or save

Pay off debt or build an emergency fund, that’s the real question. They’re both smart money moves and each is an important step in achieving financial wellness. But what if you have a stressful level of debt? Should you just tackle that first? Or can you successfully pay off debt and save for a rainy day?

We have some information that can help you prioritize based on your financial situation and needs.

What are the benefits of paying down debt?

Even if you’re keeping up with monthly payments, there are several ways that completely paying off higher-interest debt can help improve your financial health and let you focus on long-term plans:

  • As you pay off debt, you free up extra money in your budget which can help you reach other goals faster or jumpstart your savings.
  • When you eliminate higher interest debt, you save money which you can put towards your emergency fund.
  • Maintaining a strong payment history is good for your credit profile and can boost your ability to borrow when you need to.

Paying off debt can mean good things for your budget in multiple ways. So can adding to your savings; building an emergency fund to complement your budget can help your financial health, too.

How can you create a strategy to pay down debt?

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

Your first step is to identify all of your debt, look at your balance and the interest rates you’re paying. Once you have all of that information in one place, consider whether you want to follow the snowball or the avalanche approach to debt. With one approach you handle your lowest interest debt first, with the other your highest interest debt. It really depends on your personal situation.

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

Be sure to consider how much stress any strategy might cause you. You definitely want to create a balance that motivates you.

Why do I need an emergency fund?

What if your car suddenly needs major repairs? Or if you’re hurt in an accident, how will you pay your portion of the medical expenses? Where would you get the money to get by if you lost your job? These are all perfect examples of why you need an emergency fund.

Experts recommend having enough to pay between three months and nine months of 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, consider an emergency fund that will cover expenses longer, up to nine months at least. On the other hand, if you’re retired with a pension or have made a habit of living well below your income, a smaller emergency cushion might be okay.

If your emergency fund hasn’t been your top priority, you’re not alone. According to Bankrate.com surveys, 28% of U.S. adults have no emergency savings and 29% of American households have more credit card debt than emergency savings. Don’t worry, there’s still time to get started.

How can I build my emergency fund?

You’ll want to start by taking a good hard look at your monthly income and expenses and creating a budget that you and your family can live with. Be sure to build in treats and rewards – just like a strict diet, a stark budget is hard to maintain. If this sounds daunting, start small. We have advice on how to get started on a budget in three simple steps.

Take advantage of your 401(k). If you’re not contributing, get started. See if you can budget in a way that lets you maximize any matching funds your employer offers; that’s money you’re working hard to earn, so you should make sure you’re getting it to work for you.

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

Balance paying off debt and save for a rainy day

It’s easy to get overwhelmed by debt, especially if what you owe feels like it dwarfs your income. So how can you decide what to do? The answer is different for everyone. If your debt is weighing on you, then paying it down might be your top priority. Perhaps you’re worried about how you’d keep afloat if you ran into a financial emergency. Then building an emergency fund may be smart for your finances, and your peace of mind.

Realistically, however, you should look for a balance. Chip away at your debt consistently and watch the balance decrease. Ideally you’ll be able to rework your budget such that you can save a little more each month, even if it’s just the amount of interest you’re no longer paying on a loan.

Another approach may be to consolidate your higher-interest debt with a personal loan. Through debt consolidation you can give yourself a bit more control – instead of multiple payments with balances that can vary from month to month, you will have one set regular monthly payment. A fixed expense is easier to budget for, right?

A personal loan may help you save in other ways, like saving you significant money in interest payments. You could put that money toward your emergency fund.

Here’s how it might look if you took this path using a Discover personal loan:

Higher-interest debtDiscover Personal Loan
It could take many years to pay off higher-rate balances if you make the minimum monthly payment on revolving debt.

For example, making the minimum monthly payment on 3 credit cards with a $15,000 total balance and 16.22% APR on average would take over 20 years to repay.1
You choose the loan term up front — from 36–84 months — so you know exactly when your Discover personal loan will be paid in full.

For example, if you get approved for a $15,000 loan at 10.99% APR for a term of 72 months, you’ll pay just $285 per month.

Maybe you can use the money you would have paid in higher interest to fund your emergency savings. Even saving as little as $50 or $100 a month can put you on a better path for financial security. Plus, once your Discover personal loan is paid off, you can kick up your saving to an even higher level so you’ll build the emergency fund you want even more quickly.

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 with a loan for debt consolidation? You can use our calculator to estimate your savings, with no impact to your credit. calculator

1 Repayment timing estimate is based on a minimum monthly payment of 3% of the $15,000 balance or a minimum payment of $15, whichever is greater. Actual results may vary. Average APR is based on the national average found on www.creditcards.com as of 08/25/21.