Should You Save If You Have Debt?

Having debt can be stressful, and it can easily affect all parts of your life. While getting out of debt is a priority, it might also lead you to question other aspects of your financial journey. Namely, should you save if you have debt?

It might sound counterproductive to save money when you should be putting it towards what you owe, but this line of thinking could be risky. Instead, you need to create a cushion so you’re prepared for anything that lies ahead. When you don’t have a built-in financial safety net, you might find yourself falling further into the debt cycle when an emergency strikes. In this guide, we’ll help you understand whether you should save if you have debt and how to get started.

Why You Need to Save First

To answer the overall question of whether you should save or pay off debt, you should do both. While paying off debt often feels like the biggest priority, you need to make sure you have a strong savings safety net just in case. We can’t predict what will happen in the future. If there’s one thing to learn from the COVID-19 pandemic, it’s that preparedness is key.

Things like retirement savings and emergency funds shouldn’t take a backseat to your debt payoff. It’s possible for both of these to exist in harmony. While you might need to take some time to consider the right strategy for your budget, your biggest goal is to avoid going deeper into debt.

Ask yourself what you’d do if you had an unexpected emergency pop up today. Perhaps your car broke down or you lost your job. Would you have money to get out of the bind, or would you need to rely on credit or loans? If your answer was the latter, keep reading to learn the right way to save while paying down debt.

Build an Emergency Fund

Before you do anything else, you need to build an emergency fund. Yes, paying your debt is important. However, having money just in case is more important. Even a small emergency fund can keep you from the debt spiral if something happens. According to a report from the Urban Institute, families with up to $750 in savings are 30% less likely to miss a rent/mortgage payment compared to families with under $250 in savings.

While coming up with $750 right away might seem like a lot, it’s okay to start small. You should start by saving up at least $500. Ideally, experts recommend your emergency budget to be enough to cover several months of living expenses. However, this could be a bit intimidating if you’re just getting started.

If you’re not sure where to begin, use the debt avalanche or snowball method to pay yourself first. Focus on paying your emergency funds, making sure this money is somewhere safe. During this time, continue to make minimum payments on your debt. Once you reach your emergency fund goal, shift your focus back to your debt.

When Is Saving a Priority?

With that in mind, when should saving be a priority above debt? Of course, you should save until you have enough to cover unexpected expenses in your emergency fund. However, this isn’t the only time you should make saving money a priority over paying debt. Additional reasons are:

  • Retirement savings: You should continue to save for retirement using your Super fund, though you might not contribute extra funds during this time.
  • Interest rate: If your debt has a very low-interest rate (like a mortgage or auto loan), there might be less of a push to pay this down right away. Alternatively, high-interest debt like payday loans should be targeted quickly.

You should always prioritise debt repayment if you have high-interest consumer debt, like credit card debt. The sooner you pay this off, the less you owe in interest over time. Still, you need to juggle your repayments with your existing budget and savings goals. You don’t want to pay so much towards your debts that you struggle to make ends meet.

When in doubt, identify which of your financial goals are the most important. For most, this includes a mix of saving and paying down debt. The sooner you know your goals, the easier it is to focus on what’s most important to you.

Get Help with Your Debt

In a perfect world, you would strike the ideal balance between savings and paying down your debt. Life isn’t always perfect, so it’s okay to make the most of your situation. That might mean saving more upfront and paying down debt aggressively in the future. No matter your situation, consider the long-term impact and your current budget.

Not sure where to begin? Contact the experts at Debt Busters on 1300 368 322. We understand that no two financial situations look alike. We’re here to guide you every step of the way, from budgeting to saving for the future. You’re not alone.


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