Save or Pay Off Debt? Or Both?! Use This Decision Map for Guidance

Dozens of best-sellers, financial gurus and conventional wisdom will tell you to save for retirement no matter what part of the financial journey you’re on. “Save yesterday!” they shout. The one person who goes against the grain is Dave Ramsey. The man even tells people to stop getting their 401(k) employee match to put every red cent into paying off debt. Extreme much?

Here’s why? The power of focus. Dave says when people get “gazelle intense” about slashing debt in Baby Step 2, they do it in 18-24 months on average. They stop 401(k) contributions, sell everything but the kids and create extra income streams during this intense season. These folks are determined to pay off lenders quickly so they can start paying themselves.

But not everybody’s drinking the Kool-Aid. They understand the power of compound interest over time. Many folks in the debt-free community are savings for retirement and eliminating debt, forgoing Dave’s advice. I’ve been tempted to follow suit.

Are you on the fence, too? Ask yourself these questions to determine whether to save, slash debt or save and slash at the same time. See what I decided at the end of this post.

Do you have at least $1,000 in savings?

Yes? Awesome! You can start aggressively paying off debt. Having $1,000 or one month’s income saved means you can put out fires like paying off an unexpected dental bill or replacing tires without getting into more debt. That’s key!

If ‘no,’ chill out on aggressive debt payments. Pay the minimum until you save up $1,000 in an account you can easily access when emergency situations arise. An interest-yielding account at a credit union or online bank that’s separate from your main checking account and debit card will come in handy for this. If you feel more comfortable putting away $2,000 or a full month’s income, then go with that. Personal finance is personal. These questions and tips are guidelines.

Save or Pay Off Debt Decision Tree

Do you have a big life event coming up like a move, surgery or birth?

If so, then save cash. Plan ahead so you don’t have to foot the bill with a credit card or loan from your retirement funds. Remember: The goal is to slash debt, not create new debt.

Do you want to get rid of debt quick, fast and in a hurry?

Slash! Go for it and don’t look back! Your $1,000 savings should help you stay afloat during this season. Skip down to read my decision.

Does your job offer a match for retirement contributions?

If you don’t get a match and you’ve saved $1,000, then get to slashing. Start eliminating that debt with a fury. When you’re done, start saving with a fury.

If so, then consider doing just enough to get this match. That could be putting in anywhere from 3-6 percent of your pre-tax income. That’s a small price to pay to get matching dollars from your employer. If you’re one of the blessed folks who gets matched dollar for dollar, then you double your retirement contributions each month. That’s hard to pass up. Sorry, Dave.

Are you OK with losing that employee match?

If you are, then go straight to the debt payoff. If you aren’t, then peace of mind and a sense of security are probably more important to you than paying off debt as quickly as possibly. Save and slash debt at the same time.

Are your interest rates for consumer debt (i.e. credit cards and car loans) higher than 10 percent?

If so, then you’d be doing yourself a huge favor by slashing that debt. You could be saving at a lower rate than you’re earning in interest on those credit cards and car loans. You’d be extending debt payments by months or years trying to save at the same time. Instead, focus single-mindedly on getting a return on your money by eliminating that high-interest debt.

My Decision

I was once a huge save and slash enthusiast. But something’s come over me recently. I think it’s that gazelle intensity. I don’t have an employer-sponsored retirement vehicle. Therefore, I don’t even have the option to get a match. So I’m going to forgo saving in my Roth IRA to slash debt. Call me Miss Scissorhands. I drank the Kool-Aid. I gotta get this monkey off my back.

Whatever you decide, stick with it. Work the plan with confidence. It’s your money. It’s your life. Only you know what’s best for you.

What have you decided? Are you saving, paying off debt or doing both at the same time? Tell us how you made that decision below.

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