The Personal Finance Dilemma: Balancing Saving Money and Paying Off Debt

Debates about personal finances often revolve around whether to pay off debt or save money. It is a debate that continues to divide people.

It can be difficult to know where to start or what to do when you are just starting out and trying to determine your financial path.

I was also faced with this problem a few years ago. I did my research, ran the numbers but was still unsure of what to prioritize.

You’ll also see that many experts will choose one path over the other. You will also find stories about other bloggers or media who have chosen one path over another.

Saving money or paying off debt is a difficult decision for those who are just starting out.

Table of Contents
Saving money vs. paying off debt
When should you choose to save before paying off debt?
When should you pay off debt before saving?
Balancing Both
Final Thoughts
Saving money vs. paying off debt
You’d probably lean toward paying off your debt as your primary goal if you looked at the math and saw the interest rate on your debt. Right?

It’s not as easy as it seems, depending on your current financial situation and goals.

As a newbie to personal finance, in 2014 I had a lot of debts, including student loans, credit cards, and car loans. However, my savings were very low, as was the amount that I saved for retirement.

After reading and researching what I wanted, I found myself still arguing with myself about which was better: paying off debt or saving money.

The research provided some excellent examples of how math can be applied to real life. Even with this information, I could not make a decision.

You can blame it on indecision or ignorance of finances, but I was worried I would make the wrong choice if I chose one path over another.

It’s for this reason that I call it a financial conundrum or a difficult and confusing problem to solve.

You may even be yelling, “What are you doing?” You might even be screaming.

“Look at the numbers and math in your situation!

This was a fight for me at that time. Further down, I will share my decision and why.

When should you choose to save before paying off debt?
Even those who do, save a small amount of their income. (CNBC)

Building an emergency fund is one of the best reasons to save money before paying down debt.

It is important to have some money saved up for unexpected expenses or emergencies. It also relieves you of money-related stress.

If you are lucky, your interest rates may be low. You might want to save this money until you can cover six months of expenses.

You should also take advantage of 401k plans offered by your employer. You want to save money for your retirement.

Many companies offer to match your company’s investment up to a certain percentage or offer profit-sharing. Compound interest can be added to your returns, and you’ll have some money working for you.

You can lose money by delaying investing or retiring. Your money will then have to work more hard in the future.

When should you pay off debt before saving?
In 2018, the total revolving debt of consumers was $1,039 trillion. (Source)

Consumer debt is also a major problem. Interest rates on credit cards can be astronomical.

For example, my Visa has a 23% interest rate. Imagine if I had thousands of dollars on this card. It would be like giving away extra money!

When your interest rates reach double digits you are unlikely to beat the savings rate and it is highly unlikely that you will be able to beat them in the stock market when investing for retirement.

In essence, interest on debt is greater than the returns you are likely to make by investing. The more interest you pay on your debt, the less sense it makes to invest because the returns will still be below average or not generate any significant value.

Paying off your debts early will allow you to save and invest more quickly. I paid $321/month on my car and another $312/month on student loans. This is over $630 per monthly, or over $7,500 annually.

This money could’ve been invested in retirement or savings. The compound interest rate on the money invested would make me very sad.

Another reason why I struggle with what to do!

Balancing Both
You can also treat everyone equally. After weeks of internal debate, I finally decided to go with this option.

I think that it could be a more popular choice. However, I don’t have any solid data to support this.

Is it the right choice?
The second part of my financial conundrum was solved. In the past two years, my decisions have been good, but in 2014-2016 I still had doubts about whether they were right.

When I was going through this internal struggle, my student loan debt amounted to approximately $18,000 and I owed $13,000 on my car. Around this time, I also remember that I was free of credit card debt.

When I looked at my loan breakdowns, the highest interest rate for both the student loans as well as the car was 6%. After reading finance books and becoming obsessed with investing, I realized that compound interest and saving could be a powerful combination.

I decided to continue paying the minimum monthly balance, increase my saving rate and earn more money. I decided that I would continue to pay the recurring minimum balance each month, increase my savings rate, and make more money.

After I built up a decent amount of savings, I paid the remainder of my car loan in 2017. This was $320 per month at a 6% rate of interest (my student loan balances are in the range of 4-5.5%). This money helped me to increase my saving rate.

After those few years I now have more than $70,000 in savings and investments (at the moment of writing this), leaving me with only $4,000 left to pay off my student loans.

If I had focused only on my debt, I could have paid it back and paid less in interest, but would have missed years of compounding interest and saving money.

My savings allowed me to go on some amazing trips I could not afford otherwise.

Did I do the right things? You and mathematically, you may not agree. To me, my financial situation and choices are now in harmony with what I think.

Final Thoughts
Saving money and paying off debt are two of the biggest challenges that you’ll face when it comes to your finances. There are also many sources of information that support one side over the other.

What should one do if there is no clear winner?

There are pros and cons to each. The decision ultimately depends on your personal financial goals. You might end up choosing to balance your worries equally, like I did.

If I hadn’t started saving money in 2017, I would have missed out on the compounded interest and returns that continue to grow.

You can use the information above to guide your own decisions.

You can achieve financial success in a variety of ways, depending on where you put your focus.