Pay Off Debt or Save for the Future?

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8 MINUTE READ | JUNE 28, 2021

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If you want to set a solid foundation for your financial future, it can feel like there’s so much to do. You’ve got to save for retirement, future purchases, emergencies, your kids’ college tuition—the list goes on. Oh, and if you have debt, you need to pay that off too. It can get overwhelming. What comes first? Should you pay off debt or save for the future? Or should you try to tackle it all at once?

We’ll answer that last question first: no. Let’s say you have to eat an elephant. How do you do it? One bite at a time. Money works the same way. If you try to go after everything at once, you’ll just spin your wheels without making any real progress. You’ve got to tackle your goals one at a time.

But where do you start?

Which Comes First? Pay Off Debt or Save for the Future?

So, should you pay off debt or save for the future? The truth is, the answer to this question depends on where you are in your money journey. Let’s take a look at the 7 Baby Steps (our tried and true, step-by-step plan to get out of debt and save real money) to make it a little clearer.

  1. Save $1,000 for your starter emergency fund.
  2. Pay off all debt (except the house) using the debt snowball.
  3. Save 3–6 months of expenses in a fully funded emergency fund.
  4. Invest 15% of your household income in retirement.
  5. Save for your children’s college fund.
  6. Pay off your home early.
  7. Build wealth and give.

How Do You Know Which Step You’re On?

Do you have $1,000 in savings? No? Start on Baby Step 1. Yes? Then move on to the next question.

Do you have debt? If you do, you’re on Baby Step 2. Even if you’ve got a ton in savings and are investing, you need to pause those other money goals and focus on paying off your debt first. If you don’t have debt, then you’re ready to start saving—first for your emergency fund and then for retirement.

Okay, it might sound crazy to stop your other money goals, but keep reading to see why as we walk through each step one at a time.

1: Save a starter emergency fund.

Life happens. We know this. But did you know 36% of Americans don’t have the cash to cover a $400 emergency?1 Having $1,000 in savings is your first financial step because it helps you build a buffer against any life happens moments. You need this stash of cash in the bank, ready to make those would-be emergencies a paid-in-full annoyance.

If you’ve never had more than a quarter in your savings account at a time, $1,000 might seem impossible. But by cutting back on your spending, selling stuff, and more, you can save up $1,000 in a month or less.

This $1,000 is just a starter emergency fund to protect your budget while you’re paying off debt. You’ll beef it up in step three.

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