Paying Off Debt vs Saving: What to Choose

Estimated Read Time: ~10 minutes

Reviewer: Adam Olson, CFP®, LUTCF, FSCP, RICP
Certified Financial Planner®

 

Video Transcript

Summary: Deciding between paying off debt vs. saving can be confusing, especially when both feel like pressing priorities. This article helps you evaluate your options and find a balanced approach that suits your financial situation.

Is it better to save or pay off debt? It’s a question that comes up all the time, and because everyone’s situation is different, there’s no one-size-fits-all answer.

When you’re dealing with monthly bills and trying to build some financial security, figuring out where your money should go first can be tough. Some financial professionals say focus on high-interest debt, while others tell you to prioritize an emergency fund.

Both saving and paying down debt matter for your financial well-being. Mitigating financial risk means finding the right balance for your situation. What makes sense for you depends on factors such as your interest rates, how stable your income is and what you’re trying to achieve.

If you’re aiming for a debt-free life, that’s going to shape your strategy differently than someone focused on building savings. Understanding financial independence at any stage helps you make choices that actually work for your life.

Let’s explore the benefits of paying off debt vs. saving, key factors to consider when deciding between the two and practical strategies for achieving both objectives.

Understanding the concept of paying off debt

Incurring a level of moderate debt is part of an average household’s financial journey. After all, debt is a risk you take on willingly, knowing it must be repaid within a timeframe.

However, when debt exceeds a manageable level, it can significantly disrupt your financial stability. This undermines the impact of financial security, often resulting in both mental and emotional strain.

Adam Olson, a Certified Financial Planner®, says, “When you’re dealing with credit card debt, discretionary spending has to be reevaluated. Subscriptions, takeout, and convenience purchases aren’t necessities, they’re choices that can delay real financial progress.”

Rising debt can become even more challenging to manage when inflation drives up the cost of living. As everyday expenses increase, people often turn to credit cards to cover the gap, which can compound debt levels and make it harder to stay on top of repayments.

High inflation has led to more than a quarter of US adults relying on credit cards for day-to-day expenses. What’s more, 64% of all credit card holders now carry debt from month to month.¹

Credit cards typically have the highest interest rates, meaning a large portion of your monthly payments goes toward interest instead of reducing the principal balance. As a result, you end up paying far more than the original price of your purchases in the long run.

This makes it even more important to build savings, as they can act as a financial cushion for unexpected emergencies and expenses. Having savings on hand can reduce the need to rely on high-interest debt, helping you avoid falling deeper into financial strain.

Making progress, even in small steps, can reduce stress and build momentum toward larger goals. Seeing your credit card debt shrink month by month boosts motivation, helping you pay it off quicker and stick to a holistic financial plan, including long-term saving goals such as retirement.

Importance of saving

Saving can mean different things to different people. For some, it’s putting money in the bank; for others, it’s buying equities. Economically speaking, it’s about cutting back on consumption today to enjoy more in the future.

It’s a key decision that enables you to build a financial cushion for big purchases, emergencies or retirement. Regularly setting aside a portion of your income helps you create a safety net that lessens your reliance on debt when unexpected expenses arise.

Many financial professionals recommend having an emergency savings fund to cover your bills in case of job loss or unexpected expenses, such as medical bills or car repairs.

Saving money is also vital for financial security in your retirement years. You can save for your retirement by contributing to a 401(k) or IRA retirement account, which can significantly grow your savings over time through the power of compound interest.

Is it better to save or pay off debt?

With economic uncertainties such as inflation dictating our choices, the decision to save money or pay off debt can be complicated. Ideally, you should be able to do both, but if you are struggling financially, that may not be a viable option.

In practical terms, many people find it helpful to split extra money between debt repayment and savings. Even dedicating a small percentage of additional income to each goal can help you make progress in both areas.

This approach reduces the pressure to choose one over the other and helps maintain momentum toward long-term financial stability.

Balancing both priorities allows you to build a strong foundation for a debt-free future while also preparing for unexpected expenses and long-term goals.

Factors to consider when choosing between paying off debt and saving

How do you figure out which route to take? There are a few key points worth considering before you commit to one strategy over the other.

Your financial situation is different from everyone else’s, so what works for your neighbor or coworker might not be the best move for you.

Let’s break down the primary factors that should influence your decision:

1. Interest rates

Interest rate is probably the most crucial factor to consider when deciding whether to save or pay off debt. If you have a high interest rate on your credit card, it negates any interest you may be earning on your savings. Therefore, it makes sense to prioritize paying off your debts over saving.

For debts with lower interest rates, it may make sense to save while making minimum payments. Balancing your payments according to the cost of your debt versus the growth of your savings can maximize your financial outcome.

2. Debt management

How are you at managing your debts? Do you make your monthly payments on time? Struggling to keep up with payments and manage debt can quickly escalate your financial troubles. Credit card companies often impose high late-payment fees, making it even harder to get back on track.

Late payments also hurt your credit score, making it difficult to borrow money in the future. This is why it’s important to stay on top of your debt and make your payments on time. It’s not just about avoiding late fees, but about protecting your financial future.

3. Credit utilization

Credit utilization measures the ratio of your total available credit to the amount you’re actually using. For instance, if you have a $5,000 credit limit and a $3,000 balance, your credit utilization is 60%.

It’s generally recommended to keep your credit utilization below 30%, as exceeding this threshold can negatively impact your credit score. If you’re using more than 30% of your credit limit, paying down your debt could be a smart move to help protect your score.

4. Emergency savings

Saving your money may sometimes be wiser than paying off debt. Without an emergency fund, you may be forced to use a credit card when unexpected expenses arise, putting you in even more debt.

Starting small, even with as little as $1000, can help you avoid falling back into debt and give you peace of mind. This financial cushion makes it easier to stick to your debt repayment plan, helping you regain your financial freedom without being derailed by unexpected expenses.

Best ways to pay off debt while still saving

Balancing debt repayment with saving is difficult but not impossible. The following strategies provide a path forward, demonstrating that it’s possible to achieve both financial goals:

1. Making a budget

The first step in paying off debt and building your savings is to create a budget to better understand where you are spending your money.

Tracking your spending can reveal small leaks that can be redirected to debt or savings. Little things such as subscriptions, takeout meals or impulse buys add up over time.

2. Choosing a debt repayment method

There are various strategies available for paying off debt. Two of the most recommended are the debt snowball and debt avalanche methods.

The debt snowball method prioritizes paying off smaller debts first while maintaining minimum payments on larger debts, fostering a sense of achievement as smaller balances are cleared.

In contrast, the debt avalanche method targets the debts with the highest interest rates first, minimizing long-term interest costs.

Olson adds, “Any repayment strategy falls apart if new debt keeps being added. Snowball, avalanche, or a hybrid approach only works when spending is under control and balances stop increasing.”

3. Setting up automatic savings

Once you’ve created a budget and determined how much of your income you can save, set up your bank account to automatically transfer a percentage of each deposit into your savings. Even small, regular deposits can grow substantially over time.

Consistency matters more than size. Automatic deposits of even $25 to $50 per week add up and make saving feel effortless.

Paying off debt vs. saving: Let Mutual of Omaha help you decide

Deciding whether to pay off debt or save money depends on your financial goals. Primary factors to weigh when choosing between paying off debt and saving include interest rates, credit utilization, emergency savings and debt management skills.

Ultimately, the best approach involves a combination of saving and debt-repayment strategies that align with your financial situation and long-term objectives.

At Mutual of Omaha, our personalized financial advice and comprehensive planning can help you develop a strategy tailored to your unique needs. This ensures a balanced approach to saving and debt repayment that supports your long-term financial goals.

Reach out to a Mutual of Omaha financial professional, who can work with you to develop a personalized plan that aligns with your financial goals and helps you make confident decisions so you can secure your future and protect what matters most.

Frequently asked questions about paying debt vs. saving

Is it better to save money towards a down payment on a house or pay off debt?

Generally, it’s better to pay off high-interest debt first. This improves your debt-to-income ratio and credit score, which can help with mortgage approval and secure a lower interest rate. Depending on your situation, you may be able to balance both debt repayment and saving for a home.

What is the 50-30-20 rule?

The 50-30-20 rule divides your income into three categories: 50% for needs, 30% for wants and 20% for savings and debt repayment. You can adjust these percentages based on your goals, such as allocating 30% to savings and debt reduction, and 20% for discretionary spending.

Is living debt-free worth it?

Living debt-free offers financial security, increased disposable income and reduced stress, as monthly debt payments no longer burden you. It can offer peace of mind and allow for greater savings or investment opportunities. However, not all debt is bad. Mortgages or student loans can be considered “good debt” with long-term benefits. The key is managing debt wisely and ensuring it stays within a manageable, strategic limit.

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Reviewer: Adam Olson, CFP®, LUTCF, FSCP, RICP

Wealth and Retirement Strategist

Adam is a Certified Financial Planner, author and podcast host with a deep passion for helping clients navigate all aspects of personal finance, from financial planning and investment management to life and health insurance. His goal is to empower individuals and families with the knowledge and tools they need to make confident financial decisions. He resides in Norfolk, Nebraska with his wife, Katie, where they are raising their four boys.

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Sources

1. Bankrate, Bankrate’s 2026 Credit Card Debt Report | Bankrate, January 2026

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.  Mutual of Omaha Advisors is a division of Mutual of Omaha Insurance Company.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

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Video transcript:

Should you pay off debt or build savings? It depends on your situation, but with the right plan, you may be able to do both. Start by looking at interest rates. If your credit cards are charging 20% while your savings earn 4%, those high interest debts are costing you money. Focus on paying those off first.

Next, check your debt habits. Missing payments and racking up late fees, that’s eating into your financial future, and it’s a sign you need to manage your debt better. Also, look at your credit usage. Using more than 30% of your credit limit, pay that down before adding to your savings. Here’s one exception. If you don’t have an emergency fund, save something first. Even a small cushion helps you avoid more debt when unexpected expenses hit.

Want to save while you pay off debt? Start by creating a budget that shows what you can realistically put towards debt and savings each month. Pick a debt payoff strategy, such as targeting high interest balances or paying off your smallest debts first, then set up automatic transfers to your savings
account to build a cushion. You might also explore consolidating multiple debts into one manageable payment.

The bottom line, with a clear plan, you can chip away at debt and build savings, giving yourself breathing room today and security for tomorrow. For more helpful information on financial planning and managing debt, visit mutualofomaha.com.