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How to Save Money While Paying Off Debt? (4 Smart Strategies to Help)

Ever wondered how to save money while paying off debt? Let me show you the numbers and some solid strategies for saving while paying off debt.

Competing priorities.

young couple laying on floor using calculator, text overlay "tips for how to save money and pay debt at the same time"

For anyone thinking through how to save money while paying off debt at the same time, this is what you're dealing with.

And figuring this out? Can feel impossible.

That's because many of the choices you face each day – like filling up your tank on “E” before heading out on a trip, or just leaving for the trip – have a clear winner.

An easy-peasy choice that keeps you away from the clear and immediate consequences of going down the wrong path (ahem – if this choice is not easy, then you might want to reassess things).

But “should I pay off my debt and save money at the same time?” Well…there's no clear-cut answer.

Not only that, but you fear the potentially bad consequences you don't know could happen from choosing the wrong option.

We're going to tackle one of these stickier financial questions today: should you or should you not pay off debt and save money at the same time.

But first, let's talk about how important it is that you have financial backups – no matter which strategy you choose.

Should I Empty My Savings to Pay Off My Credit Card?

Eesh – just reading that headline makes my stomach turn.

I mean, emptying your savings to wipe out credit card debt or debt of any kind is not a decision to make lightly.

And yet, this is what my husband and I did to knock out the last $7,600 of our student loan debt.

It can be done – you just need to do it smartly.

The real trick is that no matter what you decide to do, you need to keep enough in savings or have enough backups so that you feel safe and not financially vulnerable.

Did I mention you want to try to set things up so that you won't take on more debt in an emergency? Because if you empty your entire savings account for debt repayment, only to get back into debt when something happens and you're caught without money to pay for it…then it kinda defeats the purpose.

Fortunately, you likely have financial backups other than your savings (and I encourage you to write down what they are to help you make your decision about this):

Personal finance backups include:

  • Insurance Policies: What types of insurance policies do you have, and what would you be liable to pay in the form of deductibles and copays in the event of an emergency? Be sure to keep enough in your savings to cover deductibles so that you don't end up back in debt in a claim situation.
  • Roth IRA Contributions: Did you know that you can withdraw the contributions you made to a Roth IRA penalty-free? I do not recommend this, but it is good to know your full picture.
  • Ability to Work Overtime at Will: Do you or your partner work at a job where you can easily pick up overtime whenever you'd like?
  • Credit Card Grace Period: Do you have credit on your credit card? Your grace period is the time between when your billing cycle ends, and when you'll start being charged interest. Find out how many days this is, to use in the event that you need it.

Sit down and figure out what your financial backups are (beyond money in the bank), and then keep reading.

How to Calculate if It's Better to Keep Money in Savings or Pay Off Debt

If you've got some money in savings, and you also have debt, then you've probably gone back and forth on whether or not to keep the money in savings or to pay off debt.

The other reason why you may be here is to figure out where to concentrate your money efforts for any extra money you have – whether to save it or to put it towards debt payment.

The answer to both of these from 100% financial motivation is the shortest one, so we'll start with that.

WARNING: Strictly financial answers are usually not the answer that will work. Why? Because people are people – they have emotions, needs, and wants that can crowd out the logic of numbers. Think about it: if answers that make 100% financial sense were the ones that worked, then the Personal Savings Rate in America would be huge and the debt load would be minimal…yet it's the complete opposite).

Financially-Backed Answer: you do whichever way is going to get you the most return on your money.

You see – interest works both ways. You can either earn interest or pay it. And many people are doing both at the same time.

Financially speaking:

  • Earning More Interest by Saving Money: if the interest rate you would earn on the money you put into savings would be higher than the interest you are paying in debt, then you would want to save as much of your money as possible and pay as little of your debt as possible (the bare minimums).
  • “Earning More” Interest By Not Paying it Out: If your debt interest rate is higher than what you would earn if you put your money into a savings account, then you would want to pay as much of your debt off as possible.

You can use this save money or pay off debt calculator to plug in your own information, and what you should do based strictly on the numbers.

Simple, right?

Well…not exactly.

Ultimately, you need to decide what makes sense for you + your situation.

I know, I know…that sounds like a cop-out.

But I'm going to hopefully make your choice much easier by not only sharing what my husband, Paul, and I did while we were paying off our own debt, but also by sharing several other strategies to choose from.

Strategies for How to Save Money While Paying Off Debt

Everyone's situation varies. That means that some strategies for how to save money when in debt make more sense for some and not for others.

For example, if you have kids or a variable rate on your mortgage that could increase your monthly payments at any time, then you likely want to keep more in savings before tackling your debt above the minimum payments.

But if your costs and obligations are relatively low, then you can focus more intensely on debt repayment and have less in savings to tide you over in the meantime.

Here are some strategies to answer the question of how much you to send to savings versus to debt:

  1. One for You, One for Me Approach: Fund your emergency savings with a few months' worth of money. Then, any money you make above your bills (which includes debt repayment), send half into debt payments and the other half into your savings.
  2. Toxic Debt First, then Rebalance: Categorize your personal loan and other forms of debt to figure out which is toxic debt (high-interest rates that have the potential to sink you, such as credit card/medical/payday loan debt) and which is more neutral debt. Focus on getting rid of toxic debt first and put savings second. When you are out of the toxic debt, do a more balanced approach to debt and saving at the same time.
  3. Gazelle Intense with Minimum Financial Guardrails: Keep enough in savings to cover deductibles on your various insurance policies, then funnel everything else (above bills) to debt.

Note: Always pay at least the minimum on each of your debts, no matter which strategy you choose.

What We Did While We Were Paying Off Debt

My husband Paul and I faced this question at one point during our debt management as well. It was the summer of 2009 and we had just gotten engaged (*squee!*). One of the first things we resolved to do was to vanquish the rest of our combined $25,000 in debt before walking down the aisle.

We needed to know how to pay off debt quickly.

We were completely focused on getting out of debt. Well, that and not getting into more debt in the months ahead as we paid for our wedding and put a down payment on our first home.

So what we did was figure out how much we would need to send in each month in order to have the remaining debt paid off by our wedding day (divided our debt by the number of months 'til the chapel — an almost-accurate amount, as it didn't take into account further interest accrued). Then, anything left over after paying our bills and making this debt repayment each month was put into savings for our big upcoming purchases (house + wedding).

In other words, we used the “Gazelle Intense with Minimum Financial Guardrails” strategy from above.

Our Backups: You might be wondering why we so brazenly spent most of our savings accounts on getting out of consumer debt, getting married, and buying a home. The reason why we took this rash move is because we had backup plans in case an emergency crept up while rebuilding our emergency fund.

For example, we had $1,500 sitting on the sidelines in a money market fund at a brokerage firm that we could easily liquidate for emergencies. We also each have Roth IRAs. While we would never want to tap these for money, we knew that we could take out the contributions we made tax and penalty-free in the event of an emergency.

Finally, we each had established credit lines. Of course, it would've stunk to go back into debt right after getting out of it, but we saw these as a last resort to float us for the 30-day grace period.

The thing is, whether you are paying off debt or saving money but still in debt, you are actually still moving forward. This is because net worth calculations include both assets and liabilities. If you plug your information into a net worth calculator (I've used this free one for years), and you add in savings or debt reductions, you'll see that both affect your overall level of wealth.

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Amanda L Grossman

Personal Finance Writer and CEO at Frugal Confessions, LLC
Amanda L. Grossman is a writer and Certified Financial Education Instructor, Plutus Foundation Grant Recipient, and founder of Frugal Confessions. Over the last 13 years, her money work has helped people with how to save money and how to manage money. She's been featured in the Wall Street Journal, Kiplinger, Washington Post, U.S. News & World Report, Business Insider, LifeHacker, Real Simple Magazine, Woman's World, Woman's Day, ABC 13 Houston, Keybank, and more. Read more here or on LinkedIn.


Wednesday 13th of March 2019

I’ve always found that saving and paying debt at the same time worked for me but I agree there’s not a one size fits all!

Cathy Fraser

Monday 22nd of September 2014

Love your site! Some great tips especially in this post as well. I have been reading a book on finances as I am just not on the top of my game as far as that goes. The book is called The Joy of Skinny: Finances, it's by 2 ladies Aylsworth and Manchester. They have such a great practical look at managing finances and it's well worth the read. skinnylivingproject.com is their site. Good, good stuff!


Tuesday 23rd of December 2014

Thanks so much for reaching out, Cathy.

Money Beagle

Monday 22nd of September 2014

Unless one aspect is a clear 'winner', then I see nothing wrong with splitting priorities. You can always make adjustments if one option becomes more favorable than the other.


Monday 22nd of September 2014

Definitely doable! It's completely up to what someone's priorities and situation are.


Monday 22nd of September 2014

So many people don't know you can pull the principal out of your Roth IRA (penalty free) any time. I would never want to do it, but hey, it's an option.


Monday 22nd of September 2014

Hey, Will!

Yes, I would never want to do it as well...but I want to put it out there so that others know all of their options.