How to Save Money While Paying Off Debt

By Sam Swenson | Updated March 3, 2023
reading time 4 min read
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Paying down debt while trying to save is a contentious topic among financial experts. A few of the more common questions in this arena include:

  • Should you put your savings on hold while you pay off debt? 
  • Do you continue saving and potentially struggle to make larger-than-minimum payments on your debt? 

From one angle, the advice is to save while paying down debt. This can allow you to build interest-earning savings and at the same time can provide a safety net in the event of an emergency.

Others think it’s best to focus all your effort (and money!) on paying down debt before you start saving. This is especially true if your debt comes with high interest rates, like those associated with credit card debt. The average interest rates on most retail credit cards can be 21 percent or higher

How you save and pay off debt depends on your financial situation

The truth is, there’s no one-size-fits-all answer for how you should save or pay off debt. It depends on your existing level of debt, your income, and how much you already have in savings and investments. 

Saving while paying down debt may not always make perfect financial sense, but building up your savings can provide peace of mind—especially in the case of an emergency. 

Having an additional layer of security  may be more important than paying off debt, especially if you’re routinely bothered by a lack of cash savings

If you have savings but also have high-interest credit card debt

In the event of job loss or an unexpected emergency, it’s recommended that you have at least six months to a year’s worth of expenses saved. If you have some savings already, (like 1-2 months’ worth  of living expenses saved)) prioritize paying your high-interest credit cards first before accumulating more savings.

If you have several high-interest credit card balances at once, consider consolidating them into one loan with one monthly payment. Upstart’s marketplace offers personal loans to help pay down your debt. 

The interest rates for personal loans may be lower than those of credit cards, so you may save money on interest by consolidating with a personal loan.

You can also free yourself from the burden of paying multiple credit cards on different due dates every month. Additionally, you can pay off an Upstart-powered personal loan early without any penalties. 

Tighten your spending and consider using that money to pay down debt

Because you don’t have an endless supply of money, you may need to scale back on your monthly spending so you can focus on directing more money towards debt pay down. 

Here’s a quick list of spending categories for which you could potentially limit your spending:

  • Eating out/restaurants
  • Entertainment
  • Ride sharing (Uber/Lyft)
  • Unused subscriptions
  • Shopping/Amazon purchases

If you have no savings

Not having anything set aside for emergencies and irregular expenses means you’re leaving yourself vulnerable to racking up more debt. Examples of irregular expenses include lump sum car insurance payments, sudden medical expenses, or any other family emergency.

If you don’t have any savings, don’t worry. But It’s a smart idea to balance your budget so you’re putting more money into savings than debt for at least a few months. 

If this is you, you may need to make minimum payments on your debt for the time being – or at least until you’ve saved at least a few months’ worth of living expenses. It’s not the end of the world, as long as it’s temporary and you have a timeline in place to build your savings.

2 ways to quickly pad your savings

  1. Consider trying a spending freeze. This means you commit to only spending on necessities during the allotted time (bills, groceries, rent, mortgage) and to stop spending elsewhere. 
  2. Increase your income. Use your skills to bring in extra income. This can include anything from freelance work, babysitting, driving for a rideshare company, or renting out an extra bedroom on Airbnb. 

If the thought of making only minimum payments makes you cringe, pay a little more than the minimum amount while you work to pad your savings account. 

If you don’t have high-interest debt and lack long-term investments

Unlike credit cards, mortgages, student, and auto loans tend to have relatively low interest rates. If you don’t have high-interest debt but don’t have enough in your investment accounts, consider shifting your focus to long-term investing before paying off your mortgage or car loan in full.

This recommendation has to do with the interest rates on your various debts versus how much you could potentially earn by holding a diversified stock portfolio for the long run. 

In other words, if the interest rate on your mortgage is 4%, but the potential return on the stock market is 7% , focusing on your investments may make more sense. This allows you to capture the 3% difference and improve your net worth.

Why long-term investments matter

Long-term investments are important for retirement. If you determine that your retirement funds are insufficient, considering factors such as your age, desired retirement age, and required income during your retirement, it is recommended to increase your contributions to your 401(k) or IRA.

If you’re already making contributions, consider increasing the amount or max it out. In 2022, you were able to contribute up to $20,500 to your 401(k) ($27,000 if over 50), while in 2023, you’re able to contribute up to $22,500 ($29,000 if over 50). 

Consider signing up for your company’s 401(k)

If your employer offers a 401(k), it’s usually a good idea to sign up as soon as possible. The best way to invest in a 401(k) is to make sure you’re contributing enough to get your employer match, which is usually a fixed percentage of your salary. Here’s a quick example:

Let’s say you earn $50,000 a year and you contribute 6 percent of your salary to your company’s 401(k) plan. This gives you $3,000 in the first year, ignoring any return on investment. If your employer matches 100% of your contributions, you’d have $6,000. If your employer matches 50% of your contributions, you’d have $4,500 in the plan. 

How will you improve your finances?

Saving while paying off debt involves an understanding of how much debt you have and the amount of interest you’re paying. You may also need to make lifestyle shifts so you can focus more on saving and getting rid of your debt. There’s no right or wrong way to pay off debt and save. It’s all a matter of coming up with a strategy, deliberately planning your next moves, and sticking with your plan to reach your financial goals.

This content is general in nature and is provided for informational purposes only. Upstart is not a financial advisor and does not offer financial planning services. This content may contain references to products and services offered through Upstart’s credit marketplace.

About the Author

Sam Swenson

Sam is a fee-only financial planner, CPA, and freelance writer. After nearly a decade in various Wall Street roles, Sam found a niche in creating objective, accessible, and actionable financial plans for everyday people. Sam has also published long- and short-form personal finance and investment planning content on various websites across the internet. Outside of work, Sam enjoys running, biking, reading, and philosophy, as well as spending time with his wife, daughter, and goldendoodle.

More resources you may be interested in

Paying Off Debt vs. Saving: What Comes First?
What Is Passive Income?
How to Prepare Financially for Unexpected Events

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