How to Avoid Using Savings to Pay Off Debt

By Kayla McCormack · June 14, 2024 · 6 minute read

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How to Avoid Using Savings to Pay Off Debt

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.

The Case Against Using Savings to Pay Off Debt

Emptying your savings account to pay off debt could cause you to rely on credit cards to cover necessary expenses, which has the potential to create a cycle of debt. Think of it this way — it can be much harder to get yourself out of debt if you keep using credit cards to cover unexpected costs.

Consider creating a plan to pay off high-interest debt while maintaining or building your emergency fund. This way, you’ll be better prepared to deal with unexpected expenses — like a trip to the emergency room.

How to Start Paying Off Debt Without Dipping Into Your Savings

First off, if you do not have an established emergency fund, consider crafting a budget that will allow you to build one while you simultaneously focus on paying down debt. The exact size of your emergency fund will depend on your personal expenses and income. A general rule of thumb suggests saving between three and six months worth of living expenses in an emergency savings account. Having this available to you can help you avoid taking on additional debt if you encounter unforeseen expenses.

Make a Budget

Now’s a good time to update or make a budget from scratch. Understanding your spending vs. income is essential to help you pay off your debt and avoid going into further debt. You’ll want to review all of your expenses and sources of income and figure out how to allocate your income across debt payments, while still allowing you to save for your future.

Establish a Debt Payoff Strategy

To start, you’ll need to review each of your debts, making note of the amount owed and interest rates. This is important to create a full picture for how much you owe. Next, you’ll need to pick a debt pay-off strategy that will work for you. Here’s a look at some popular debt-reduction plans.

•   The snowball method: With this approach, you list debts from smallest balance to largest — ignoring the interest rates. You then 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 largest debt, and so on until all debts are paid off. With this method, early wins can help keep you motivated to continue tackling your debt.

•   The avalanche method: Here, you’ll list your debts in order of interest rate, from highest to lowest. You then 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.

•   The fireball method: With this hybrid strategy, you categorize all debt into either “good” or “bad” debt. “Good” debt is debt that has the potential to increase your net worth, such as student loans, business loans, or mortgages. “Bad” debt is generally high-interest debt incurred for a depreciating asset, like credit card debt and car loans. Next, you’ll list bad debts from smallest to largest based on balance. You then funnel extra money to the smallest of the bad debts, while making minimum payments on the others. When that balance is paid off, you go on to the next-smallest debt on the bad-debt list, and so on. Once all the bad debt is paid off, you can simply keep paying off good debt on the normal schedule. You then put money you were paying on your bad debt towards savings.

Different people may prefer one strategy over another, the key is to select something that works best with your debts, income, and financial personality.

Consider Debt Consolidation

If you have debt with a variety of lenders, one option is to consider consolidating your debt with a personal loan. Instead of making multiple payments across lenders, you’ll instead have just one payment for your personal loan. Consolidating credit card debt is a common use for a personal loan because personal loans typically have lower interest rates than credit cards. Using a personal loan to pay off your credit card balances not only streamlines repayment but can potentially help you save on interest and pay off your debt faster.

Most personal loans are unsecured (no collateral required), which means you’ll qualify for the loan solely based on your creditworthiness. Personal loans for debt consolidation typically have fixed interest rates, so your payments remain the same for the term of the loan. To find the best personal loan for you, it’s a good idea to shop around and review the options available at a few different lenders, including banks, credit unions, and online lenders.

Recommended: How to Use a Personal Loan for Loan Consolidation

How to Reduce Spending to Pay Off Debt Quicker

Reducing your spending can make more room in your budget for debt payments. Making overpayments can help speed up debt payoff, but it can be challenging to amend your spending habits. To lower your spending, you’ll want to take an honest look at your current expenses and spending habits.

You can start by reviewing your credit card and bank statements to see where your money is going. Next, divide your spending into “needs” vs. “wants” and look for places where you can cut back in the “wants” category. For example, you might decide to cook dinner a few more times a week and get less takeout, cancel a streaming service you rarely watch, and/or quit the gym and start working out at home

You may also be able to reduce some of your so-called “fixed” expenses like your cell phone and internet service by shopping around for a more competitive offer or switching to a less expensive plan.

If you’ve already got a tight budget, the alternative is to increase your revenue stream. Consider a side hustle to boost your income and funnel that additional money toward debt payments. You may even be able to find a side gig that allows you to make money from home.

Paying Off Debt the Smart Way

It can be tempting to throw your savings at debt to avoid racking up expensive interest charges. But draining your savings account — or failing to save at all — in favor of debt payoff might not be a smart strategy.

With little or no savings, you’ll be less prepared for any emergency expenses in the future, which could lead to even more debt. Consider building your savings while paying off debt by creating a budget, cutting your expenses or boosting your income, and finding (and sticking to) a debt repayment strategy.

If you have high-interest credit card debt, you might consider using a personal loan to consolidate your debt. If the loan has a lower interest rate than you’re paying on your credit card balances, doing this could potentially help you save money and pay off your debt faster.

With low fixed interest rates on loans of $5K to $100K, a SoFi personal loan for credit card debt can substantially decrease your monthly bills.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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