Paying down debt can be an important financial priority, but should you use your savings in order to do so? While it can be tempting to throw your full efforts into paying off debt, maintaining a healthy savings account for emergencies and saving for retirement are also important financial goals.
Continue reading for more information on why it may not always make sense to use savings to pay off debt and ideas and strategies to help you expedite your debt repayment without sacrificing your savings account.
Table of Contents
Key Points
• Using savings to pay off debt can provide emotional relief and save money on interest.
• Potential drawbacks include losing a financial cushion and missing out on investment growth.
• A healthy emergency fund allows you to cover unexpected expenses without running up expensive debt.
• Paying off high-interest debt is beneficial when interest rates exceed savings or investment returns.
• Effective debt management strategies include budgeting, debt snowball, debt avalanche, and consolidation.
The Case Against Using Savings to Pay Off Debt
While it can feel satisfying to watch your debt balance drop, using savings to achieve that can come with unintended consequences. It’s important to weigh the risks before depleting your savings for the sake of faster debt repayment.
Emergency Funds Provide Financial Security
One of the key arguments for not using savings to pay off debt is the importance of maintaining emergency savings. An emergency fund — typically three to six months’ worth of living expenses — provides a crucial financial cushion in the event of job loss, unexpected medical bills, or an urgent car or home repair. Without that buffer, you might be forced to run up high-interest credit card debt to get by, negating the benefits of having paid off previous debt.
💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.
Opportunity Cost of Using Savings
Using your savings to pay off debt means missing out on the opportunity to invest that money or let it earn interest in a high-yield savings account. This is especially relevant with low-interest debt, such as federal student loans, certain car loans, or mortgage balances. If you could earn more interest or investment returns than what you’re paying on your debt, paying off the debt early could potentially cost you money in the long run.
Every financial decision has an opportunity cost. It’s important to consider whether your money might be better utilized elsewhere.
When to Prioritize Paying Off Debt
In some situations, however, it could make sense to pay off debt rather than save money. Here are some scenarios where you may want to use your savings to pay off debt.
High-Interest Debt
Credit card debt is notorious for high interest rates. As of May 2025, the average credit card annual percentage rate (APR) was 22.25% Given the steep cost of these debts, it can be smart to prioritize paying off credit card debt over saving. The interest accruing can quickly outpace any gains from savings or investing, so tackling high-interest debt should usually be a top priority.
Source of Stress
Debt isn’t just a financial burden; it’s often an emotional one too. If your debt causes anxiety, sleep loss, or tension in your relationships, that emotional toll is worth considering. Prioritizing debt repayment to relieve stress and improve mental well-being can be just as valuable as financial gains.
Limiting Financial Flexibility
High debt payments can limit your cash flow and force you to delay important life goals, like owning a home, getting married, going back to school, or starting a family. For example, a high debt-to-income ratio can hinder your ability to qualify for favorable mortgage rates or even a mortgage at all. By paying off debt, you free up money in your budget that can later be redirected towards other goals.
When to Prioritize Saving
While paying down debt is important, there are also compelling reasons to focus on building your savings, especially if your debt isn’t urgent or costly.
Low-Interest Debt
If your debt comes with a relatively low interest rate, there may be less urgency to pay it off early. For example, if your mortgage has a 3.5% interest rate, and your retirement investments earn an average of 7%, you’re likely better off contributing to your retirement than accelerating debt payments.
In these cases, the debt is manageable and might even come with tax advantages. This gives you room to prioritize saving and investing instead.
Access to 401(k) Employer Match
If your employer offers a 401(k) match and you’re not contributing enough to get the full match, you’re essentially leaving free money on the table. A 100% match up to 6% of your salary, for example, is an immediate 100% return on investment. That’s far more than you’d save by paying off most debts faster.
In nearly every case, it makes sense to contribute enough to receive the full match before prioritizing additional debt payments.
No Emergency Savings
If you don’t have an emergency fund, it’s wise to build one before aggressively attacking your debt. Without savings, you’re vulnerable to any financial disruption, which could force you into more debt. Establishing a modest emergency fund — say $500 to $1,000 to start — can prevent future financial setbacks and give you some breathing room.
How to Start Paying Off Debt Without Dipping Into Your Savings
You don’t necessarily need to choose between savings and debt repayment — you can do both. Here’s how to get started on your debt without draining your savings account.
Make a Budget
Creating a budget is a crucial step towards effectively paying off debt — and the process is easier than it sounds. Simply gather the last several months of financial statements and use them to calculate your average monthly income and spending.
If you find that, on average, your spending is close to (or higher) than your earnings, you’ll want to find places to cut back. First look for monthly expenses you can cut completely, such as steaming services you rarely watch or membership to a gym you rarely use. Then consider ways to trim discretionary spending, such as eating out less, avoiding impulse purchases, and finding cheaper entertainment options. Any funds you free up can then be funneled towards debt repayment.
Establish a Debt Payoff Strategy
“Focus on paying off one debt at a time,” advises Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “If you spread your money out over many debt payments, your progress may not be as fast as you want. But by focusing on one goal at a time, you can see success sooner, and that can keep your motivation up.”
Two popular debt paydown strategies to consider:
• Debt snowball: With this approach, you put extra money towards the debt with the smallest balance, while making minimum payments on all the other debts. When that debt is paid off, you move to the next-smalled debt, and so on until all debts are paid off. This method can deliver early wins and help keep you motivated to continue tackling your debt.
• Debt avalanche: Here, you put extra money towards the debt with the highest interest rate, while paying the minimum on the rest. When that debt is paid off, you move on to the debt with the next-highest rate, and so on. This strategy helps minimize the amount of interest you pay, which can help you save money in the long term.
Consider Debt Consolidation
If you have multiple high-interest debts, you might consider using a personal loan to pay off your balances, a payoff strategy known as debt consolidation. Personal loans for debt consolidation typically have fixed interest rates, so your payments remain the same for the term of the loan. Rates also tend to be lower than credit cards. In addition, debt consolidating simplifies repayment by rolling multiple payments into one.
However, debt consolidation generally only makes sense if you can qualify for a rate that’s lower than what you’re currently paying on your debt balances. Before going this route, it’s helpful to use an online debt consolidation calculator to see exactly how much you can save by consolidating debt with a personal loan.
💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.
Look Into Balance Transfer
Another way to pay down credit card debt faster is by doing a balance transfer. This strategy involves moving debt from one or more credit cards to another, ideally with a lower or 0% introductory interest rate. This temporary reduction in the APR allows more of your monthly payments to go towards the principal, helping you pay down debt faster and potentially saving you money on interest charges.
Just keep in mind that if you can’t pay off your balance during the promotional period, you’ll be back to paying high rates again. Also these cards often charge a transfer fee, typically 3% to 5% of the transferred amount, which adds to your costs.
The Takeaway
So should you pay off debt or save money? The answer is that it depends. If you have at least a starter emergency fund and high-interest debt, it may make sense to prioritize paying your balances down, either through an avalanche or snowball plan, debt consolidation, or a balance transfer.
However, if you have debt with a very low interest rate, access to an employer 401(k) match program, and/or no emergency savings, you may want to prioritize savings over debt repayment.
Ultimately, the smartest path forward often involves doing both: saving and paying down debt in tandem, based on your individual situation and future goals. This hybrid strategy can help put you on a path to long-term financial health.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Why is it risky to use savings to pay off debt?
Using savings to pay off debt can be risky because it leaves you without a financial cushion for emergencies. If unexpected expenses arise, like a medical bill or car repair, you may need to rely on high-interest credit again, putting you back in debt. Also if your savings are in a high-yield account or investment, withdrawing them could mean missing out on compound interest and future growth. It’s important to weigh the long-term impact before using savings to eliminate debt.
Which debt should I pay off first?
It’s generally best to start with high-interest debt, like credit cards, because they cost you the most over time. This strategy, known as the “avalanche method,” can reduce the total interest you’ll pay. Alternatively, you might choose to pay off the smallest balances first. Known as the “snowball method,” this approach provides quick wins, which can help boost motivation. The best game plan for you will depend on your personality and financial goals.
How much should I have saved?
A good rule of thumb is to have three to six months’ worth of living expenses saved in an emergency fund. This provides a safety net in case of job loss, medical emergencies, or unexpected costs. Your exact savings goal may vary based on your income stability, family size, and existing obligations. If you’re just starting out, aim for at least $1,000 to cover small emergencies, then build toward a more substantial reserve while balancing other financial goals like debt repayment.
Are personal loans a good alternative to using savings?
Personal loans can be a viable alternative to using savings to pay down debt, especially if you can secure a lower interest rate than your current debt carries. However, loans add to your overall debt load and come with fees and interest. Using savings avoids interest, but could leave you vulnerable if emergencies arise, so it’s important to weigh your options carefully.
How do I balance saving and paying off debt at the same time?
Balancing saving and debt repayment involves setting clear priorities and budgeting effectively. Start by building a small emergency fund (e.g., $500-$1,000) while making minimum payments on all debts. Then, focus on aggressively paying down high-interest debt while still contributing modestly to savings. Once high-interest debt is reduced, you can shift more income toward savings. The goal is to avoid future debt by preparing for emergencies and long-term financial goals.
Should I use my savings to pay off credit card debt?
Using savings to pay off credit card debt can make sense if the debt carries high interest and your savings exceed your emergency needs. Since credit cards often charge upwards of 20% interest, paying them off can save you money long term. However, you should keep a basic emergency fund — typically $1,000 or more — so you don’t fall back into debt when unexpected expenses arise. If your savings are limited, consider a blended approach — pay down some debt while maintaining a small safety net.
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