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Should You Pay Off Debt or Add to Your Savings?

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When it comes to major financial goals, two of the biggest are paying off debt and building an emergency fund.

Both are smart money moves.

But how do you prioritize them? Should you just tackle them one at a time? Or can you successfully reach both goals at the same time?

The Benefits of Getting Rid of Debt

Even if you’re keeping up with monthly payments, completely paying off debt can help put you in an even better state of mind and improve your financial health.

  • Paying off debt can help free up extra money in your budget. That extra money can help you reach other goals faster or help you build your savings.
  • Plus, you could also eliminate higher-interest payments on that debt. Wouldn’t you rather spend the money you’re paying on interest each month on something else?

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.

The Benefits of 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.

How much should you have in there? Experts recommend between three months’ and nine months’ worth of expenses, depending on your personal situation.

  • 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.
  • 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 surveys, 28% of U.S. adults have no emergency savings and 29% of American households have more credit card debt than emergency savings

Why not choose both?

So what should you 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 how you’d keep afloat if you ran into a financial emergency. Then building an emergency fund may be the right financial move.

But do you really have to choose one goal over the other?

Not necessarily. At Discover, we understand that you might want to tackle both goals at the same time instead of focusing on one goal and leaving the other untouched.

In essence, it’s a bit like the proverbial “killing two birds with one stone.” By paying down higher-interest debt with a personal loan, you could save significant money in interest payments and even have the potential to lower your monthly payments. At the same time, you could use some of the money you’re saving to start building an emergency fund.

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

  • Pay down up to $35,000 in higher-interest debt with a Discover personal loan. You can choose how quickly to pay off the loan based on your budget and financial goals.
  • Then, 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.

You don’t need to choose between paying off debt and building an emergency fund. Take advantage of a Discover personal loan to improve your financial health and work towards living debt-free.

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