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  • Writer's pictureJames Heinz

Should You Save or Pay Off Debt First? - Expert Tips

Many individuals struggle with the financial dilemma of whether to pay off debts or save first. It's a delicate balance between reducing the burden of high-interest debt and having a safety net for unexpected expenses. Understanding the importance of both is crucial for achieving long-term financial stability.

Understanding Your Debt

Understanding Debt
Understanding Debt

Before diving into the strategies, it's essential to have a clear understanding of your debt. Here are some key terms to be familiar with:

  • Revolving credit: This type of debt, such as credit cards, allows you to borrow up to a specific limit and make monthly payments

  • Term loans: These are loans with a fixed repayment period, such as personal loans, auto loans, or mortgages

  • APR (Annual Percentage Rate): The interest rate charged on a loan or credit card, expressed as an annual rate

  • APY (Annual Percentage Yield): The interest earned on savings or investment accounts, taking into account compounding

Assess your debts by calculating your debts, interest rates, and minimum payments. Financial calculators can help you determine how long it will take to pay off your debts and how much interest you'll pay over time.

Need help navigating your repayment options? Shepherd Outsourcing offers tailor-made debt management plans to help you prioritize your repayments effectively!

When to Make Saving a Priority

In certain situations, prioritizing savings may be more advantageous than aggressive debt repayment. 

  • Low-interest debt: If your debt carries a low interest rate, such as a mortgage or student loan, it may be better to focus on building your savings first. The interest charges on these types of debt are typically manageable, and the potential returns from investing your savings could outweigh the interest cost. This approach depends on individual risk tolerance, the stability of your income, and the specific interest rates of your debts vs. expected investment returns

  • Employer 401(k) match: If your employer offers a 401(k) match, it's wise to contribute enough to take full advantage of this benefit. The employer match is essentially free money that can supercharge your retirement savings

  • Lack of emergency savings: If you don't have an emergency fund, it's crucial to start building one to avoid going deeper into debt when unexpected expenses arise. Without a financial cushion, unforeseen expenses like medical bills or car repairs could force you to rely on high-interest credit cards or loans, further deepening your debt burden

Aim for a starter emergency fund of at least $1,000, and gradually work toward saving three to six months' worth of living expenses. Here are some tips for saving:

  • Automate your savings by setting up automatic transfers from your checking account to a separate savings account

  • Cut back on discretionary expenses, such as dining out or entertainment, and allocate those funds toward your savings

  • Consider taking on a side hustle or freelance work to boost your income and dedicate those earnings to your savings

Prioritizing savings has its pros and cons. On the positive side, it can provide security and momentum toward achieving financial goals. However, it may result in slower debt repayment and more interest paid over time.

Got your savings strategy down? Great, let's switch gears and dive into why knocking out debt might sometimes take the front seat.

When to Prioritize Debt Repayment

Certain types of debt can be considered "toxic" and should be addressed as a priority.

  • High-interest rates: Credit card debt with interest rates above 15% or payday loans can quickly become overwhelming

  • Payday loans: These short-term loans often carry exorbitant interest rates and fees, trapping borrowers in a cycle of debt

  • Credit cards with high interest: If you're carrying a balance on multiple credit cards with high interest rates, it's crucial to focus on paying them off. Try to stop using these high-interest credit cards for new purchases while concentrating on paying down the existing balance to avoid falling into a debt cycle

Strategies for Debt Repayment:

  • Snowball method: Start by paying off your smallest debt first while making minimum payments on the others. Once the smallest debt is paid off, roll that payment amount onto the next smallest debt, creating a "snowball" effect

  • Avalanche method: Focus on paying off the debt with the highest interest rate first while making minimum payments on the others. This method can save you more in interest charges over time

  • Debt consolidation: Consider consolidating multiple debts into a single loan with a lower interest rate. This can simplify your payments and reduce the overall interest you pay. It should be noted that consolidating debt typically requires a good credit score to get a lower interest rate and that extending the term of the loan could mean paying more interest over time, even if the monthly payments are lower

If consolidating your debts or choosing the right repayment method seems challenging, consider reaching out to Shepherd Outsourcing. Our personalized approach can simplify the process!

Prioritizing debt repayment over savings has both advantages and disadvantages.


  • Paying off high-interest debt can save you significant interest charges over time, freeing up more of your income for other financial goals

  • Eliminating debt can improve your credit score, making it easier to qualify for loans or credit cards with better terms in the future

  • Being debt-free provides a sense of financial freedom and peace of mind


  • Aggressively paying off debt may leave you with little to no emergency savings, putting you at risk of going back into debt if an unexpected expense arises.

  • You may have to put other financial goals, such as saving for retirement or a down payment, on hold temporarily.

  • There is a potential risk of falling back into a debt cycle if you don't change the spending habits that led to the initial debt.

Now that we've navigated the tricky waters of debt repayment, let's find our balance with a hybrid approach, shall we?

Balancing Savings and Debt Repayment

Should You Save or Pay Off Debt First
Should You Save or Pay Off Debt First

In many cases, the ideal approach is to find a balance between saving and paying off debt. Here are some tips for achieving this balance:

  • Create a budget that allocates funds for both savings and debt repayments

  • Use tools and resources like budget calculators, financial coaching, or automatic transfers to stay on track

  • Be prepared to adapt your financial strategies based on changes in your income, expenses, or personal circumstances

Pay attention to your personal needs and well-being while pursuing financial stability. Finding a balance that allows you to make progress on both fronts while still enjoying life is essential.

While tackling high-interest debt should be a priority, having at least a starter emergency fund is important to avoid relying on credit cards or loans for unexpected expenses. 

Additionally, once you've paid off your debt, it's essential to develop healthy financial habits and avoid accumulating new debt in the future.

Finding the ideal balance between saving and debt repayment isn't always straightforward. Shepherd Outsourcing's financial experts can help devise a plan that aligns with your unique financial situation!

Achieving Financial Stability

The ultimate goal is to achieve financial stability by simultaneously reducing debt and building savings. Here are some key points to keep in mind:

  • Having a solid financial plan that includes both debt reduction and saving for future goals is crucial

  • Be prepared to adjust your priorities based on changes in your financial situation or unexpected emergencies

  • Don't hesitate to seek professional help if you feel overwhelmed. Consulting with bankers or financial advisors can provide valuable guidance


Finding the right balance between saving and paying off debt is a personal journey that requires understanding your unique financial situation and goals. Remain flexible and willing to adapt your strategies as circumstances evolve.

With perseverance, discipline, and a balanced approach, you can overcome debt challenges and build a secure financial future.

Remember, you don't have to tackle your debt challenges alone. Shepherd Outsourcing specializes in creating customized debt repayment strategies considering your financial well-being. Book your free personal consultation and start your journey to financial freedom today!

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