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Balancing Saving Money vs. Paying Off Debt

December 2, 2021 6 mins

Whether it’s student loans or credit card bills, debt can be a downer – and many of our members struggle to balance paying down debt with meeting savings goals. You might be unsure how to use whatever money is left over at the end of the month – should it go towards your debts or into your savings account? You may be worried that focusing too much on one goal will hurt you. Here’s good news: you can pursue both goals at once.


And if you want some more specific guidance after reading these steps, our Certified Financial Specialists are here to listen and help you come up with a workable plan.

1. Cover your monthly necessities and minimum payments first

Before you begin making decisions about your discretionary money, cover your necessities – including rent/mortgage, utilities, and monthly costs, and the minimum payments due on your debts. Paying the minimum on time each month is important because:

  • On-time minimum payments prevent negative effects on your credit report
  • Many lenders charge late fees if you miss a payment or are late on a payment
  • Some lenders charge a penalty APR (a higher interest rate) if you miss making a minimum payment

It can be helpful to create a list of bills and monthly payments, organized by due date so you can see when each bill is coming due. You should also note the frequency each is due (some bills are due every other month instead of once a month) so you can figure out how much is due per month. For example, a $150 bill due every other month costs $75 per month.

Before you begin making decisions about your discretionary money, cover your necessities – including rent/mortgage, utilities, and monthly costs, and the minimum payments due on your debts.”

2. Contribute to your emergency fund each month – even if it’s only $10

Having an emergency fund is the single best way to protect your financial health. And having an emergency fund in place means it will be easier for you to continue paying down debt and building savings when an emergency strikes. Your goal is to have three to six months of expenses saved up. If that seems like an impossible goal, save anyway – even a small emergency fund can make a big difference in an emergency.

Even as little as $10 saved each month can help. Consider this: if you saved $10 each month for a year, you’d have $120 at the end of the year. This would be enough to cover the cost of repairing a flat tire, buy a one-way ticket to a nearby city to see a dying relative, or pay for a visit to urgent care for your child.

Check out our article on how to build an emergency fund – which has dozens of creative ideas to boost your fund.

3. Establish a limit for variable expenses

Once you’ve covered the necessities and allocated some money towards an emergency fund, take a look at your current spending for any variable expenses – things like eating out, buying video games or going to movies, or buying toys for your children or grandchildren.

Establish a reasonable monthly spending limit for these expenses. This amount will vary from person to person depending on what you can live with – but remember that this amount will affect how much you have left to allocate to debt and savings.

There are a couple of ways you can help control this type of spending. One is to have a dedicated checking or savings account just for these expenses. Another idea is to charge only these expenses (and no other purchases) to a specific credit card, making it easier to track how much you’re spending.

4. Think about your goals and personality

The reality is that money plays a big part in many of our goals – whether that’s sending a child to college, taking a trip to Europe with a loved one, buying a home, owning a classic car or simply having the peace of mind that comes from being debt-free. Before moving to step 5, where you’ll decide how to allocate your remaining money, think about your big goals.

In addition to considering your goals, think about your personality. Are you someone who will get more satisfaction from completely paying off a small debt – even if it means taking longer to pay off a larger debt with higher interest? Or will you be more motivated by paying off the larger debt with higher interest – knowing that you’re saving more money in the long run? Think about the actions that you’ll be willing to take when it comes to saving and paying off debt. Ultimately, you’ll need to be motivated in order to stay disciplined, so consider what will motivate your individual personality to stay disciplined.

5. Decide how to allocate your remaining money

With your goals and personality in mind, decide how to allocate any remaining money between debts and savings. This can be difficult, but if you’ve completed the steps above, you’re already ahead because now you have discretionary money to work with. For most people, a balance of saving and paying off debt is wise because it allows you to cut down on some of the interest expenses of debt, while you can also start enjoying the benefit of compound interest.

By concentrating on debt payoff (for instance, allocating 60% to 70% of your remaining money on debt), you could save hundreds or even thousands of dollars in interest charges over the life of your loans. Paying down debt can also improve your debt-to-income ratio, which can boost your credit score and your chances of qualifying for a car loan or home mortgage.

By concentrating on savings, on the other hand, you would have more cash available for unexpected expenses, and may be able to meet goals sooner, whether that’s paying for a child’s education or buying a home. Sometimes, there are also tax advantages for certain savings, such as contributing to a 401(k) or IRA. (Check with your tax advisor about your individual situation, as Patelco is not a tax advisor and cannot give tax advice.) By saving and investing now, you will also be able to take advantage of compound interest over a longer period of time than if you waited to save until you were debt-free.

If you want some specific guidance about how to allocate your remaining money, our Certified Financial Specialists are here to listen and help you come up with a workable plan.

6. Automate your decision when possible

Now that you’ve made a decision about how to handle your remaining funds between paying down debt and saving up cash, it’s time to automate. Many lenders – including Patelco – allow you to set up automatic payments or transfers to loan accounts each month. You can do the same thing with your savings using Patelco Online™ – including transferring money from external accounts to your Patelco savings account each month. Check out our Money Movement guide for more details.


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