Should You Save While You’re in Debt?

Should You Save While You're in Debt?

Today we’re going to talk about the age old question: Will crossing your eyes too much cause them to get stuck that way? No, not that one. Never that one on a Monday. We’re talking about the other age-old question: Should you save while you’re in debt? 

Over the weekend, Sally got ahold of the remote and changed the channel to a Suze Orman telethon on PBS. And like the normal humans that we are, Johnny and I watched it for 20 minutes. And as it inevitably happens anytime a personal finance expert is speaking to the masses, someone asked, “Suze, I have credit card debt and school loans. Should I be saving while I pay down my debt?” So how did Suze respond? Well, let’s take a look at how she and Dave Ramsey feel about saving while paying off debt:

Suze Says…

Suze doesn’t have a hard and fast rule about saving while paying off debt. If possible, though, she usually advises both. If a person can pay off debt quickly while also investing in retirement and saving for a rainy day, that’s the ideal. Suze recommends paying off the highest interest debt first. Sometimes she even recommends selling your home so you can put money towards savings while paying down your loans. When it comes to saving for the future, Suze doesn’t mess around!

Dave Says…

On the other hand, Dave has very specific guidelines for saving while paying off debt. Before getting started with the debt-payoff process, he recommends having a $1000 emergency fund in place. And that’s it. Until you’ve got all of your debts paid off (aside from your mortgage), Dave recommends putting every extra cent toward paying off those loans. You may be tempted to invest in retirement or ramp up your emergency fund, but Dave is wagging his finger and saying, “Don’t even think about it!”

What We Did

When Johnny and I started paying down our debt, we first made sure to have an emergency fund in place. We didn’t feel completely comfortable with only having $1000, so we aimed for about $3000 instead. Once we’d calculated our debt-payoff timeline, we compiled a budget that would allow us to save $500 a month — if all went according to plan. But we made paying off our debt the first priority. Even if we didn’t save hardly anything some months, we made sure to always put a dent in our loans. We also made the decision to contribute up to the employer-match amount for Johnny’s 401k.

So why did we choose to save? Well, at the time that we were paying off our debt, we expected that a job relocation was in our near future, which would require more than just $1000. We also didn’t feel like $1,000 was enough of an emergency fund to cover a real emergency, such as the root canal Johnny would need just a year later.

Even though we put money in savings and invested in retirement while we paid off of our loans, we think each person’s situation has a different answer. Johnny and I only had low-interest student loans to pay off, so putting some of our money toward savings didn’t cost us much in debt interest. If we’d had high-interest credit cards to pay off, we probably would have put every extra cent toward paying off debt until the balance on those credit cards was zilch.

So if you’re paying off debt and trying to decide whether to start saving, our answer is that it’s up to you! But hopefully these perspectives will help make the decision a little easier. If you’ve been there and paid (0r are paying) down that debt, how did you approach the debt vs. saving dilemma? 

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  • Reply moneystepper March 17, 2014 at 7:46 am

    We ran some numbers and found that people not saving towards retirement (in a matched pension scheme) whilst paying down debt are making a costly mistake:

    Even if your debt is horrible credit card debt at 16% interest, if you can get 4% returns on your cash through a matched pension scheme (long-term market averages dwarf this figure), its better going with retirement contributions (up to the maximum amount matched) rather than paying down debt.

    There is a document in the linked post where you can add your own numbers – I would recommend checking your actual figures yourself.

    • Reply Johnny March 18, 2014 at 11:03 am

      Awesome number crunching you did there! Definitely a great resource for others in this boat. Thanks for linking it.

  • Reply TT March 17, 2014 at 7:56 am

    I’m in agreement with you guys’ philosophy. While everyone’s situation is unique, it is hard for me to come up with one where someone should not take an employer match in their 401k. Another note–I’ve said it here before, but I’ll do it again–we utilized our Roth IRA as a way to knock out two birds with one stone. Since Roth contributions can be withdrawn at any time penalty free, ours acted as our emergency fund four our first couple of years getting off the ground. Thankfully & luckily, we never ran into an emergency that our cash in the bank couldn’t handle, and we never had to tap the IRA. Now we have two additional years of contributions that are going to be making ‘money babies’–as you guys refer to them–when we near retirement. That may not seem like much, but 40 years down the road, I think it will be significant. If we had focused solely on having those emergency funds in some cash account somewhere we would have missed out on some great annual returns over the last couple of years; then again in other years we could have lost funds; risk is involved but can be mitigated by selecting more conservative funds/ETFs..

    • Reply Johnny March 18, 2014 at 11:06 am

      Free money is free money, even if you’re in debt. And the Roth emergency fund is an idea I wish we had thought of during our debt days. But even still, the idea holds true when you’re not in debt. Odds are (and fingers crossed), you won’t need that money anyway, in which case its making those money babies all the while. And like you said, should you ever need it, it’s one withdrawal away from helping out in a pinch.

  • Reply Tarynkay March 17, 2014 at 9:17 am

    We are doing both. We have only student loan debt and our mortgage. We do not plan to pay off the mortgage early, but we are trying to eliminate the student loans in the next five years (we owe around $60K between us.). We also have a larger emergency fund due to the precarious nature of my husband’s job.

    I think it continues to make sense to do both because 1) there is no employer match- if there was, we would be saving up to whatever percent that was. Employer matches are not common here, not anymore. And 2) when we get this debt paid off, it will free up a lot of cash flow every month, which will be money that we will have access to and likely need in five years, not when we are 65 (or older, depending what they do with the retirement age in the future.)

    • Reply Johnny March 18, 2014 at 11:08 am

      Great points. If the employer match isn’t there, retirement saving while in debt is a hard sell for me. And that’s great that you two have figured out an EF that matches YOUR risk, not some arbitrary number.

  • Reply Becky @ RunFunDone March 17, 2014 at 9:25 am

    I don’t think that there should be a hard-and-fast rule about this. I have never had high interest debt. I’ve actually had a stranger come over to my blog and criticize me for saving for retirement while I have debt. I was so confused! I have student loans that I’m planning to have forgiven by working at a non-profit, and a mortgage (that I overpay on every month) with 4.125% interest. So I’m in a situation in which it makes a lot of sense to save even though I have debt. I tried to explain this to the rude stranger on my blog, and ask if he still felt the same now that he knew more specifics about my situation…but he never replied. If you have high interest debt, then certainly you should pay that off before saving. If you have low interest debt, I think you’re doing well as long as you’re either paying down the debt, or investing.

    • Reply Johnny March 18, 2014 at 11:12 am

      Aren’t critical anonymous Internet strangers the best?! If it’s worth anything, this random Internet stranger thinks you’re approaching this right. While investing will never guarantee a return quite like the interest “earned” by paying off debt quickly, there’s no reason two birds can’t be hit with one, fat moneycash stone.

  • Reply Sarah March 17, 2014 at 9:32 am

    We were trying to throw every extra cent towards our debt at first, with barely anything in our savings….but we learned our lesson the hard way when we suddenly had to replace all four tires on my car and had to use debt to do it. *ouch* Now we still put most of our money towards our debt, but we make sure to save some too. It was so nice last week when we were able to pay for a truck repair out of our emergency fund instead of adding more to our credit card balance. 😀

    • Reply Johnny March 18, 2014 at 11:14 am

      We were fortunate to not have any have major, unexpected expenses, but you outlined exactly the reason why EF’s exist. And moreover, why they should be determined based on one’s own needs/risks instead of an arbitrary number. I think Dave Ramsey’s $1000 is a great starting point/minimum, but it probably requires a little more internalizing to determine if it’s the right fit.

  • Reply Miranda March 17, 2014 at 10:16 am

    When we were paying off debt we kept a $1000 emergency fund. We had to use it a couple of times (thanks food poisoning!) and it was NOT fun not having a ‘real’ savings account (and all the peace of mind that comes with it), but we made the decision to go for it and throw almost everything at our debt. It worked out for us and we didn’t have an emergency that cost more than $1000. It might seem like such a small number, but I agree with Dave’s idea that it will cover 90% of the emergencies that pop up. Sure, we knew that an emergency could have came up that cost more than $1000, but we were willing to take that risk anyway. We also knew that if we had say, a $3000 emergency fund, we would’ve been worried about a potential $4000 emergency. I think it’s really a mental game. Also, I think only having $1000 available really narrowed the parameters of what constituted a ‘real’ emergency. Now, if we had known about something (like your potential relocation), we would’ve saved accordingly, but all we could see was ‘debt-payoff’ in our future, so we just went full steam ahead.

    • Reply Johnny March 18, 2014 at 11:16 am

      Dave is a money-psychology genius, so I’m sure there’s some solid rationale (like the ones you’ve outlined here) behind his $1k figure. Great points. Thanks for chiming in.

  • Reply Danny C. March 17, 2014 at 12:27 pm

    Every tax-advantaged savings opportunity should be seriously considered as a contender for your extra money. Everyone should be able to put their options side by side on a spreadsheet or online calculator (pay down schedule versus investing plus tax savings) and see financially what is best for their money.

    The employer match is huge, but many don’t consider the tax savings of additional contributions to a 401k or IRA. Depending on your tax bracket, you get 10% to 33% back come tax time. After going through the comparison, I went from employer match only and everything else to student loan debt, to maxing out 401k and IRAs and anything left to student loan debt. It’ll be hundreds more in student loan interest but thousands saved in taxes.

    **Disclaimer: I’ve also never met anyone that regretted paying off any form of debt.

    • Reply Johnny March 18, 2014 at 11:18 am

      Great, great points. Most folks getting out of debt would be well-served putting the numbers to a spreadsheet and seeing what makes sense. Employer-match is a definite no brainer, because like I said above, free money is free money, no matter one’s financial situation. And great points on the additional tax savings benefits with certain investments that make saving all the more practical while getting out of debt.

  • Reply Anne March 17, 2014 at 12:52 pm

    I’m more with Suze and you guys on this one, Dave’s rules are too hard-and-fast, and frankly I can’t ever imagine declining FREE MONEY by skipping out on an employer match.

    I’m debt-free minus the mortgage (and M just has a small car loan that we plan to pay off in full later this year), and I’d intended to pay extra on the mortgage until M and I talked about it. We ultimately decided that since as long as you owe anything on the house it still belongs to the bank that we’d funnel that cash to a taxable account instead and pay off the house in two big chunks- one when we can get rid of PMI (hopefully about a year from now/5 years early) and one when we can pay it off entirely. Dave would think we’re crazy, but our interest rate is so low so we should easily do better in the stock market, and we feel better having the flexibility of more liquid assets.

    • Reply Johnny March 18, 2014 at 11:21 am

      Amen, Anne. And I think you’re approaching it right. I’d like to think Joanna and I would do similar in your mortgage situation, but we’re still suckers for the idea of “we’re debt free!” which I recognize is a complete psychological benefit. Hopefully when we’re at your stage, we’ll be wise enough to see that there are likely better financial options on the table than just throwing everything extra at debt.

  • Reply Melanie March 17, 2014 at 2:38 pm

    I read books by both Dave Ramsey and Suze Orman, and I like to think I did a combination of both while paying off debt. I started my true debt payoff with about $6K in the bank, and left that untouched due to the contractual nature of my job and fear of job loss. I stopped adding to my savings account and put all extra money towards debt. BUT I never stopped my retirement contributions, as Dave suggests to do. During my debt payoff, I did stop my 403b contributions (my company puts in 10% regardless of any contributions I do/do not contribute) and instead opened a Roth IRA and max it out by putting in about $458 per month.
    So, now, as I build my six month emergency fund, (and am debt free), I still do my Roth contributions. As others have said, the Roth is great because you can withdraw your contributions at anytime with no penalty. So…Im saving for retirement and an emergency fund at this point. I guess you need to do what works for you. Paying down debt OR saving, or both, are great either way. 🙂

    • Reply Johnny March 23, 2014 at 10:39 pm

      I think the Roth emergency fund is great. Fingers crossed, you won’t need to touch that money — in which case, cha-ching for your retirement! And if you do, no problemo. Just withdraw it with no questions asked. And kudos on your 403b! That’s an amazing employer contribution!

  • Reply Carla March 17, 2014 at 2:57 pm

    I think Dave’s rule is straight wrong. If I’d followed his advice, I’d probably be in debt even further than I am now! Since I started paying down debt about a year ago, I’ve moved 3 times, paid a $1,400 tax bill, paid a credit card off 100% when the interest hit, and a few other things I’m forgetting, all out of my savings. If I hadn’t put a penny away during that time, I’d have been hurting when each of those bills came up. Now that I’m down to just a car payment, I save at least as much as I put towards my car (it’s a super low interest loan on a Prius, so I’m not rushing). Having no car debt isn’t going to help me much when I go to move again in August, so savings it is.

    (And I’ve mean to ask… What do you guys have against Levar Burton? I loved Reading Rainbow!)

    • Reply Johnny March 23, 2014 at 10:43 pm

      Thanks for sharing, Carla. We were (and have been) in the same boat for the last few years with moving, so we totally feel that pain. And like you said, without money in the bank, we’d have been right back where we started with debt.

      So as far as LeVar goes… we love the man, too. So much, in fact, that if he ever did visit our blog and comment, we wouldn’t know what to do with ourselves and the whole Internet as we know it would explode. And that’s why we have the disclaimer. 🙂

  • Reply Michelle March 17, 2014 at 9:11 pm

    I’m with you two! I am currently saving for retirement (don’t have a choice) but thank goodness for that! I am now focusing on my savings account outside of retirement. Now that I have more money in savings I feel a lot more at ease about paying off my debt.

    • Reply Johnny March 23, 2014 at 10:45 pm

      As great as paying down one’s debt a few months early, I’d much rather spring for peace of mind with a solid emergency fund/savings. At some point, the math makes more sense to attack the debt solely, but so long the money is going into savings and not being spent, I think it’s an okay trade-off.

  • Reply Rob March 17, 2014 at 10:25 pm

    Well guys, like many of the others who’ve commented here, we too paid down debt and saved at the same time. We married in our early 20’s and, after renting for 3 years, bought our first house. Back then while paying our regular monthly expenses, we were able to put a limited amount of money into our RSP plans (,my personal and my wife’s spousal – my long term strategy for eventual income splitting) while gradually paying down our mortgage. In fact, we even put a little money aside so that once a year we could throw some extra money at the mortgage principle and prepay down the sucker. I figure that alone saved us buckets of mortgage interest $$$ over the years until we were finally mortgage free in our late 40’s. It just took planning, budgeting and sacrifice.

    • Reply Johnny March 23, 2014 at 10:49 pm

      We need to get on that home-buying train if we stick to our plan of being Mr. and Mrs. Rob clones. 🙂 Mortgage freedom by 40 sounds awesome. We’ll definitely set a goal around that as soon as home-buying time comes along.

  • Reply Kasey @ Debt Perception March 18, 2014 at 12:49 pm

    I’ll be paying off debt for what feels like forever and it’s a constant struggle to try to save. It’s hard enough putting a percentage of my freelance income away for taxes.

    • Reply Johnny March 23, 2014 at 10:51 pm

      Ughh, freelance taxes are the WORST! When I was working as a copywriter contractor, I opened up a new bank account and just auto-deposited the 30% or whatever it was in estimated taxes straight to that account. Out of sight, out of mind.

  • Reply E.M March 18, 2014 at 1:19 pm

    I don’t think $1,000 is enough for my situation, as we’re also looking at relocating for my boyfriend’s job soon. I’ve been saving and paying off my student loans for a while, and I have finally reached the point where I have enough in my emergency fund. I’m looking forward to putting more toward my loans!

    • Reply Johnny March 23, 2014 at 10:54 pm

      Awesome! Congrats. One of my favorite activities in our debt-paying days was recalculating how much sooner we’d be out of debt by adding $X amount every month. Sucks to know that extra money isn’t going into your bank account, but in time (and hopefully sooner with that fatter payment), it sure as heck will be.

  • Reply Anna // Gone Banannas March 18, 2014 at 1:54 pm

    Ahhh the age old question, is right! The only debt that I have right now is credit card debt, and I feel like I have been carrying it around like a hangover that just won’t let me be for AWHILE. Once I finally landed a job that allowed me to get more grounded financially, I started really putting a dent in it and now I can see the finish line! I do, however, still save quite a bit. I probably put more into savings than needed but, you really just never know when that apocalypse (necessary new car) might hit.

    • Reply Johnny March 23, 2014 at 10:58 pm

      Once we got close to the end of our debt, we took a few thousand extra that we had saved over the last year (instead of putting toward our debt) and threw it at the Debt Monster all at once. It never knew what hit it. We figured we’d immediately be able to start putting all the debt payment cash straight in our bank account each month anyway. So while we, like you, did end up saving more than we maybe needed to, it all ended up going toward our debt in the long run anyway.

  • Reply Katy @ katytrackslife March 18, 2014 at 4:14 pm

    This is such a big dilemma!! We’ve followed Dave Ramsey but always feel like we’re in “catching up” mode, paying off our credit card each pay check to then use it the next one. Agh!

    We are generally debt free except for our home and hecs (our student loans, which are auto-paid from salaries) but no savings. Our mortgage is high enough that it’s always tough to choose between extra mortgage payment, pay off student loan, save, invest, contribute to superannuation, or just use the money for day to day spending. It’s really tough sometimes to work out how to do that well!

    We’re in Sydney Aus so it’s a million-dollar property market. We have over $600k left on our mortgage and I’m the main income earner but trying to have a baby so we mostly just out extra money on the mortgage. We figure at least a house can be income generating (we rent out our spare room) and we know the huge mortgages we have will really hurt if interest rates go up again (currently they’re about 5% but Australian interest rates have previously gone up to over 18% so our collective thinking is pretty wary of interest rate rises)

    • Reply Jae Mann March 22, 2014 at 4:52 pm

      Hi, Katie, I noticed that you are using Dave Ramsey’s plan.

      So am I. There some things about your post that caught my attention.

      I notice you have no savings and you still use your credit card. Step o1 in the Dave Ramsey plan is to save set aside $1000 so that you don’t need to use your credit card. If random expenses keep popping up, you should consider revamping your budget. I’m a teacher, but I forgot to budget for classroom supplies. Twice I had to take money out of various categories in my budget to buy classroom supplies, so I went back and revamped my budget.

      The other thing you said is that you have a hard time choosing between paying the mortgage, paying student loans, saving, and investing. Step 2 of Dave Ramsey’s plan includes listing the debts you want to pay in the order that you want to pay them. If you go ahead and decide whether or not to pay the mortgage or student loans first, you don’t have to keep thinking about that decision. Saving and investing money will come later so you can focus on the debts.

    • Reply Johnny March 23, 2014 at 11:03 pm

      Jae has some great advice, per Dave’s plan. But we totally feel your pain when it comes to what to do with that little extra dough each month. While the math doesn’t always add up, we are huge fans of debt snowballing the smallest amounts first, and working up to the larger debts. In this case, I’d imagine your student loans would be the first target. The psychological freedom of eliminating debt, even if it’s just a small chip into your overall debt, is a major victory. We definitely attribute our momentum and speed of paying down our student loan debt to this philosophy.

      Best of luck, and thanks for sharing!

  • Reply Wade March 19, 2014 at 11:07 am

    I am a firm believer that Dave Ramsey has it right. He doesn’t recommend a 5 or 10 year “get debt free” plan. A max of 2-3 years of gazelle intensity to get debt free except the house is what he speaks of.

    Whatever you can save during this time will be made up many times over once you get debt free. The small savings or contributing to your 401k a bit to get a match, dilute the power of paying things down fast.

    Once you are debt free you build up your emergency fund and then start saving 15%. The 2 or 3% you saved while trying to pay down debt will be quickly made up if you really follow the plan.

    In the end, whatever you do, do it with fervor and intensity. Once you get out the other side, so the same with saving.

    Great post.

    • Reply Johnny March 23, 2014 at 11:08 pm

      Great points, Wade. There’s a reason Dave’s plan works and it’s because of that gazelle intensity that he somehow persuades you to acquire.

      While we diverged from his path slightly by putting a little extra padding in our savings, we ended up right back on his path because we took that extra savings we didn’t end up needing and threw it all right back at our debt. So while it helped us move from UT to NYC to MA and provided a little extra peace of mind, we were still able to hit our debt repayment goal using that extra savings the final two months. It’s all about that gazelle intensity!

  • Reply Slinky March 19, 2014 at 2:27 pm

    I”m uh….not actually paying any extra on my debt at all right now. I might wipe out the ~$10k at 4.2% in the next year or two, but everything else is <3% interest rates. I'm pretty alright with leveraging low interest debt as long as it doesn't interfere with having an appropriate amount of cash flow. Debt free is nice, but financial independence is better and with such low interest rates, the math comes out in favor of investing.

    • Reply Johnny March 23, 2014 at 11:10 pm

      Smart take. This definitely seems like the most logical approach. We definitely didn’t have the understanding or confidence to do anything like that when we were paying down our low-interest student loans. So while the math probably worked against us, so long there is positive movement in one’s net worth, you’re doing something right.

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