Should You Save Money When You Have Debt?

March 11, 2019

It can be so frustrating to want a financial answer and continuously read “It depends”.
Here’s list of why I think you should save money when you have debt.

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It can be so frustrating to want a financial answer and continuously read “It depends”. So I'm FINALLY answering the question "Should you save money when you have debt?"
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A question I used to ask myself (and Google) quite often is “Should you save money when you have debt?”

There are so many different answers to that that I thought my brain would explode. The main answer I found on those sites: It depends.

I understand that personal finance is just that: personal. Unfortunately, that means there is no one right way to do things. Let me tell you- that can be incredibly frustrating for Type A people like myself. After reading countless articles and books, I have compiled a list of reasons why you should still save money when you have debt. That’s right; I’m taking a side.

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<How I likely look reading article after article saying “it depends” when I just want a question answered>

So, if these reasons sound suitable to you, I believe the answer is yes: You should save money when you have debt.

You still need to (at the very least) make your debt minimums. Beyond that, you can decide how to divide your excess money [that seems like such an oxymoron, like good grief…. or jumbo shrimp…. or pretty ugly…. okay I will stop now] between savings or debt.

Savings can mean many things: short term goal funds, investments for retirement (figure out how much you’ll need for retirement here), your emergency fund (I call mine my “Don’t-worry-be-happy account” because it sounds less stressful), etc.

Regardless of what you are actually saving for, here are the reasons I think saving money when you have debt is smart:

1. You can likely earn a higher interest rate on investments than you pay on some debts

Instead of fixating on my debt like I used to, I focus more on improving my overall net worth (Read how to calculate yours (and why you should) here ). My debt has an interest rate that matches prime, and is also tax deductible. Last year, that meant I was paying 3.7% interest on my loans. My retirement savings however earned 9.6%. If I am looking at an overall improvement to my net worth, if I were to put equal money on investments and debt, the investments helped me more financially.

If you have credit card debt, there is a high likelihood that the interest rate is so painful (i.e. high) you should focus every penny you have on paying it off. Other debts, such as student loans, mortgages, and some vehicle loans, have lower interest rates that often make investing the better choice. How do you know which interest rate is okay?

According to JL Collins, author of The Simple Path to Wealth” (which I highly recommend)) a good rule of thumb is:

If your interest rate is:

  • Less than 3%? Pay the minimum and focus your money elsewhere
  • 3-5%? Decide what feels right to you
  • Above 5%? Pay that blood sucker off (I may have paraphrased; those weren’t his exact words)

Again, you get to decide what feels right to you. If your debt keeps you up at night, focus on that regardless of what the interest rate is. Only you know if being debt-free matters more to you than overall net worth. Both ways are great!

2. Avoid going further into debt

Income changes. You may be in a job that has a highly variable income: artist, waitress, commission salesperson, casual dietitian (like meeee), etc. Basically, any job that does not guarantee you a set number of hours or set amount of money per hour. Even salaried jobs change; there are layoffs and cutbacks. I’m not trying to be negative. We all like to think life will go exactly as we have planned in our minds, but lets be honest:

Life can be a jerk sometimes!

Expect life curve balls, and they won’t bother you as much when they occur. I’ll write an entire post on how I manage my budget with a variable income, but for now I will just say I put money away monthly in my don’t-worry-be-happy account. As much as part of me wants to throw every penny I have on debt, I care more about always making forward progress.I want to know each month I will have less debt than the previous month. The way I manage that is to have money tucked aside for unexpected uh-ohs (or slow work months) so I never have to use my credit card and go backwards. There is nothing worse than watching your hard-earned progress disappear.

3. It builds the habit

They say one of the hardest parts of saving is getting started (don’t ask me who they are; I made that up because it makes my point). Plain and simple, once you start saving money you are officially a saver. You have entered the club. When you are just starting out, it can be hard to feel like your money will amount to much because you do not have much to put in savings. Give yourself permission to start small, and grow your savings muscles. Putting just $25 a month in investments for 30 years will give you almost $28,000 in the bank (assumed 6.5% interest rate). Slow progress is better than no progress!

4. You likely have other life goals besides being debt free

So many of the articles I read ignore this fact, and it drives me crazy. Life and time will not stop because you have debt. To make the numbers work, so many suggestions revolve around pausing everything until you are debt free.

I’m sorry, but that is not realistic!!

People might have trips they want to do before they settle down. Someone might want to get a dog. Maybe you desperately want to own a home. Perhaps the biological clock is ticking and you cannot stop dreaming about having a family. These desires do not just go away because you have debt! Life never got the memo that it is supposed to just stop.

I’m not saying “To heck with debt! I’m going on a spending spree!”. I’m suggesting that you need to find financial balance and ways to pursue what really matters to you right now while you responsibly pay down your debt.

The book Worry-Free Money has some of the best suggestions for this that I have read. Be reasonable about what you can afford, but let yourself be happy too.

5. Find balance

I believe doing any one thing to the exclusion of others does not set you up for long term success.

What do you want out of life, besides being debt free?

Do you want some money in the bank so you can make a career change?

Do you want to have a comfortable retirement?

Do you want to travel and experience other cultures?

Allow yourself to prioritize your short and long term goals.

By all means, make a plan for your debt and commit to it. But also allow yourself to have a life too (read my article on that here).

Those are my 5 suggestions for you as to why you should save money when you have debt. If you felt uneasy reading them because you still just want to put every penny on debt, you answered your own question! It’s like when someone flips a coin and says “heads means ‘this'”. You instantly know which side you were hoping for, you just needed to be shocked into choosing.

Let me know in the comments if this article was helpful, and if there are reasons you are for or against saving money when you have debt!

For a list of all posts I’ve written, click here

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