Whitney Nielsen, Bankrate.com
There is a reason why financial advisors continue to encourage you to save money in emergencies. According to Bankrate’s 2025 Annual Emergency Savings Report, three Americans have had to tap on emergency savings over the past year. However, when you are juggling your debt, spending money on savings can sometimes feel overwhelming. Many people find repayment of their balance more beneficial than adding money to their savings.
As a general guideline, financial experts suggest building a small emergency fund first. This is enough to cover the cost of a month. This helps you avoid slipping deep into debt when surprises appear. Beyond that initial safety net, focusing on paying off your debts and increasing savings depends on your unique situation and goals.
Seven factors to consider before paying off debt or building savings
Having six months of emergency funds (or more) and no debt is clearly an idea. However, most people need to prioritize increasing their savings and paying off their debts. Choosing which one to prioritize depends on your own circumstances. Consider these seven factors before deciding whether to pay off your debt or build up savings.
1. How much is your current savings?
Your first step is to assess how much you are currently saving. Financial experts generally recommend that a easily accessible high-yield savings account (HYSA) has at least a month’s worth of important expenses. This should cover important expenses such as mortgages and rent payments, groceries and shipping costs. Without this buffer, even small surprise costs can derail your finances and drive you even further into debt.
If you don’t save a month, this should be a priority soon. If you already have enough money to save enough, assess your debt and other financial priorities to determine where to focus next.
You may have heard advice from friends or online, but $1,000 is enough for a starter emergency fund. Considering recent inflation and tariffs could lead to increased costs of living, $1,000 might not be enough for most Americans. Aim for a minimum living expenses for at least one month. This gives you a more reliable safety net that suits your lifestyle and budget.
2. How much debt do you have?
The amount of debt you have and how it compares to your income can have a significant impact on your financial health. If your debt load is high or your debt income (DTI) ratio is over 36%, reducing your debt than expanding your emergency funds is urgent.
Remember: High debt levels not only cost you over time through interest payments, but also limit your financial flexibility and increase your financial stress. Putting your debt burden first can build up a significant savings to free up more money later.
3. What is the average interest rate for debt?
Another important consideration is the interest rate for debt. If your debt consists primarily of high profit accounts – like an average annual rate (APR) of 20% on average – you are effectively losing money every month, delaying paying it. In these cases, a proactive focus on debt repayments can save you more money than you would get from attracting interest in a savings account.
Higher credit usage, or the percentage of credits you use, can also have a negative impact on your credit score. By prioritizing paying high-profit debt, you reduce your overall debt and improve your credit health. This will benefit your wider economic future.
4. What type of debt do you have?
The type of debt you carry is just as important as the amount. Some obligations, such as mortgages and low-interest car loans, are usually considered “good” or constructive obligations, as they provide long-term benefits or low interest rates. If these debts make up a large portion of what you owe and you are comfortable meeting your minimum monthly payments, focusing on savings is a wise move.
Bankrate View: However, if most of your debts are short-term obligations, such as credit cards or high-profit personal loans, prioritizing debt in return is often a more financially beneficial strategy.
5. Can I budget for savings and debt return?
Consider your monthly cash flow carefully. You may not need to choose only between savings and debt repayments. Instead, allocating some money to debt each month may be the most practical path to saving at the same time.
This strategy will allow you to steadily reduce your debt while gradually building emergency funds. It will help you protect you financially from future set-ups without sacrificing the progress of your debt.
6. What are your other financial goals?
Think about your broader financial situation. Perhaps you are looking to buy a home, expand your education, or buy a new car soon. These goals may require you to save on down payments or upfront costs, even if you have outstanding debts.
Reducing your debt can improve your credit score, making it more attractive to lenders and ensuring a better fee for your loan. However, if you don’t have enough savings for a down payment, your plan may be accomplished. You may need to balance debt repayments with target savings to achieve your personal goals.
&. Can I consolidate my debt?
Consolidating high-profit debt into low-interest loans or transferring credit card balances to an interest-free introductory period can significantly reduce the cost of your debt. If the consolidation lowers average interest rates or allows you to pay off your debt faster at no additional charge, you can release cash directly targeted towards savings.
Money Tips: Be careful before making this decision. To avoid further debt, make sure you can repay the transferred balance before the promotion period expires.
How to decide what to tackle first
Deciding whether to tackle your debt or focus on building emergency funds depends on comparing the interest rates you are paying with the potential income, compared to the potential income from savings. To illustrate how this works, let’s take a practical example.
Suppose you have a car loan at a 5% interest rate and you have consistently made monthly payments on time. We are also considering putting extra cash into a high-yield savings account that offers an annual yield (APY) of 4.5%. At first glance, it seems logical to pay off your car loan first, as interest rates are high. But it’s not always that easy.
Your car loan will positively contribute to your credit profile in several ways.
It will be added to the credit mix. It helps you maintain a longer credit history. Shows consistent payment records.
Keep in mind: these are all important factors in building or maintaining a healthy credit score. Too fast this type of debt means losing these benefits prematurely.
Meanwhile, putting additional funds into a high-yield savings account creates a stronger financial cushion. Savings can prevent you from relying on a credit card or loan when unexpected expenses arise. This will protect you from accumulating higher profit debts in the future. If you change your mind later, you can apply lumps from savings to loan repayments.
Conclusion
Ultimately, it doesn’t have to be either or a situation to decide whether to prioritize debt payments or savings. For many people, alternating between building emergency funds and reducing debt has proven to be the most effective.
Start by creating an early safety net. Aim for at least a month’s worth of important expenses. After establishing this baseline, turn your focus to actively tackling high profit debt like credit cards and stop eating your finances. Once your most expensive debt is controlled, make your emergency savings a comfortable cushion for 3-6 months’ worth of expenses.
Once you have a comfortable savings cushion, keep your attention on paying off long-term low-interest obligations such as car loans, student loans, and mortgages. This helps balance payments with other financial goals. Strategically alternating approaches allow for a steady achievement of greater financial stability while minimizing stress.
©2025 Bankrate.com. Distributed by Tribune Content Agency, LLC.
Original issue: May 9, 2025, 1:50pm EDT
