Everyone knows we should be saving money. We want to save for retirement, save for emergencies, save for college, and save for vacations (among other things!).
But how are we supposed to put money aside for later when we need to pay our debts now?
In a survey from personal finance company Achieve.com and Money.com, just under a third of 2,000 Americans surveyed reported that their debt increased in the past year, and 34% of respondents said they can't make their debt payments in full every month.
As debt grows, saving money for the future can become significantly more challenging. However, that doesn't mean it's impossible — it just might take a while.
Should you save money while paying off debt?
Yes, you should save money while paying off debt. Otherwise, you could find yourself stuck with even more debt when an emergency comes up — and it always does.
That being said, there are cases in which you might want to allocate more money to debt and less money to savings, even temporarily. High-interest debt like credit cards will snowball if you let them; paying them off quickly should be a top priority. Experts typically consider manageable interest rates to be under 6% to 8%. In contrast, interest rates on consumer debt like credit cards can easily top 20%, meaning your debt is growing significantly faster than your savings, and even your investments.
If you have some emergency savings, you might consider temporarily decreasing your contributions to long-term savings (such as retirement accounts) in order to make larger debt payments instead.
If your debt's interest rates are manageable, however, then putting more of your money into savings is a good call.
How to save money and pay debt at the same time
It seems simple, but the first step to paying off debt at all is understanding how much money you have, and how much money you owe. It's extremely common not to know this off the top of your head.
It's time to hunt down all of your account logins, make some lists, and look at the numbers in black and white.
Here's what you need:
- All your debts, with their balances and interest rates
- How much money you bring home each month
- How much you spend each month
The money to pay your debts and to save for the future comes from the same pool: the money "left over" after paying the living expenses that keep you afloat. After costs like rent, mortgage payments, utility bills, and groceries, it's up to you to figure out where you have "extra" right now, or where you can cut back on spending to create some wiggle room.
Don't cut out all your wants; doing so will likely be unsustainable, leaving you without a workable long-term plan.
Once you're done, you'll be left with a list of exactly what debt you owe and a budget showing you how much extra money you have available.
Now, it's time to set up an auto-deposit into a separate savings account each month; this will be your emergency fund. Even small regular payments into your savings will build up over time. Using a separate, ideally high-interest savings account will let you earn more on your money than you'd likely get from a checking account while making it more difficult for you to spend your hard-earned money.
Above, we talked about deciding how much money goes into savings versus toward your debt. If you have high-interest debts, allocate more of this surplus to debt payments. If you have lower-interest debts, you might want to consider putting an equal amount toward savings and debt.
Where exactly your debt payments go depends on how you choose to tackle your debt overall. There are two different approaches: the avalanche method and the snowball method.
Which method is better: snowball or avalanche?
The avalanche method is better than the snowball if you want to pay the least amount of money overall. However, the snowball method is better if you could use some extra motivation.
With the avalanche method, you'll make the minimum payments on all of your debts except for the highest-interest one, which you'll pay off as much as your budget will allow each month. This will help you deal with the most expensive debt first, reducing how much you pay over time. Once the highest-rate debt is paid off, you put that money toward the next-highest, and so on.
Another option is the snowball method, where you make all of your minimum payments and put the rest of the money toward paying off your smallest balance. Once that one is eliminated, you prioritize the next-biggest. People like the snowball method because the wins come more quickly, and you get to cross debts off your list.
Numbers-wise, the math behind the avalanche method will probably have you paying less over the life of your debt. But if you're feeling overwhelmed by your debt, the snowball method can give you some easy wins to start.
Is it better to consolidate or refinance debt?
Some debts might be worth consolidating or refinancing. Which process is better depends on what types of debt you have.
Consolidating means combining several different debts into one. For example, if you owe $500 each on two separate credit cards, it might be worth consolidating them onto a balance transfer credit card with a lower introductory interest rate. Alternatively, companies like Achieve can help you use a personal loan to consolidate multiple credit card debts. This can be helpful for keeping track of your finances, in addition to making sure you're paying the least amount of interest you can.
Refinancing means taking an existing loan, such as a student loan, mortgage, or auto loan, and replacing it with a new one that has better terms. Refinancing is useful specifically if you can get a better interest rate from another company — but watch out for hidden fees that might cost you more long-term. In the case of student loans specifically, government-backed loans may come with repayment and forgiveness options that aren't available with private student loan lenders.
Refinancing can also be hard to do successfully if your credit score has gotten significantly worse because of your debt. You might struggle to find a company that will offer you a better interest rate.
How does debt relief work?
The above strategies make some assumptions. They assume you can find wiggle room in your budget if you try, and they assume you aren't so paralyzed by overwhelming debt that you feel able to take action on your own.
This isn't the case for everyone. When you need help taking action, you may want to consider speaking to a nonprofit credit counselor or looking into debt relief programs.
The two services have different purposes and price points. Credit counselors will help you make a plan to tackle your debt going forward, but they won't actually do anything to lessen your debt. If you go to a nonprofit counselor, you'll generally be able to use their services for free or pay a small monthly fee.
Debt relief programs take a more hands-on approach. Professionals work directly with creditors to negotiate and resolve eligible unsecured debts for less than the full amount owed. While fees apply for successful settlements, debt relief may help consumers reduce the total amount they repay and can provide a structured path toward becoming debt-free. For people who are unable to keep up with debt payments under the original terms, debt relief may also serve as an alternative to bankruptcy.
Just make sure to do your research before signing up. A reputable debt relief company will never ask you to pay program fees upfront and will provide clear expectations about how long the process is expected to take.