There’s a reason financial advisors keep recommending you save money for emergencies. More than one in three Americans needed to tap their emergency savings in the past year, according to Bankrate’s 2025 Annual Emergency Savings Report. But when you’re juggling debt, putting money toward savings can feel overwhelming. Many feel paying down their balances would be more beneficial than adding money to savings.
As a general guideline, financial experts suggest building a small emergency fund first — enough to cover one month of your expenses. This will help you avoid sliding deeper into debt when surprises pop up. Beyond that initial safety net, focusing on paying off your debt or increasing your savings depend on your unique situation and goals.
7 factors to consider before paying down debt or building your savings
Having a six month (or more) emergency fund and being debt free is obviously the idea. However, most people need to prioritize increasing savings or paying down debt. Choosing which one to prioritize depends on your unique circumstances. Before you decide between paying down debt or building your savings, consider these seven factors.
What is your current amount of savings?
Your first step should be to assess how much you currently have in savings. Financial experts generally recommend that you have at least one month’s worth of essential expenses in an easily accessible high-yield savings account (HYSA). This should cover essential expenses like your mortgage or rent payment, groceries and transportation costs. Without this buffer, even minor surprise expenses can derail your finances and push you further into debt.
If you don’t have one month’s worth of savings, this should be your immediate priority. If you already have enough money in savings, evaluate your debt and other financial priorities to determine where you should focus next.
Is $1,000 enough emergency savings?
You might have heard advice from friends or online that $1,000 is sufficient as a starter emergency fund. Given recent inflation and tariffs potentially leading to rising living costs, $1,000 likely is not enough for most Americans. Aim for at least a full month’s worth of your minimum living expenses. This will give you a more reliable safety net that is tailored to your lifestyle and budget.
How much debt do you have?
The amount of debt you’re carrying and how it compares to your income can significantly influence your financial health. If your debt load is high, or your debt-to-income (DTI) ratio exceeds 36 percent, reducing your debt is likely more urgent than expanding your emergency fund.
Keep in mind:
High debt levels not only cost you more over time through interest payments, but they also limit your financial flexibility and increase your financial stress. Bringing down your debt burden first can free up more money later to build substantial savings.
What is the average interest rate on your debts?
Another critical consideration is the interest rate on your debts. If your debt consists primarily of high-interest accounts — like credit cards averaging around a 20 percent annual percentage rate (APR) — you’re effectively losing money every month you delay paying it down. In these cases, focusing aggressively on debt repayment will likely save you more money than you’d gain from accruing interest in a savings account.
A high credit utilization ratio, or the percentage of credit you’re using, can also negatively impact your credit score. Prioritizing paying down high-interest debt will both reduce your overall debt and improve your credit health. This will benefit your broader financial future.
What types of debts do you have?
The kind of debt you carry matters just as much as the amount. Some debts, like mortgages or low-interest auto loans, are considered “good” or constructive debt because they typically offer long-term benefits or lower interest rates. If these debts constitute the bulk of what you owe and you’re comfortably meeting your minimum monthly payments, focusing on savings is often the wiser move.
Bankrate’s take:
However, if most of your debts are short-term obligations, like credit cards or high-interest personal loans, prioritizing debt payoff will often be the more financially beneficial strategy.
Can you budget for savings and debt payoff?
Consider your monthly cash flow carefully. You may not need to choose exclusively between saving and debt repayment. Instead, allocating some money each month toward debt while simultaneously contributing to savings could be the most practical path.
This strategy allows you to steadily reduce debt while incrementally building your emergency fund. It will help protect you financially from future setbacks without sacrificing progress on your debts.
What are your other financial goals?
Think about your broader financial picture. Perhaps you’re aiming to purchase a home, expand your education or buy a new car soon. These goals may require you to save for down payments or initial costs, even if you have some outstanding debt.
Reducing your debt can boost your credit score, making you more attractive to lenders and potentially securing better rates on loans. However, without sufficient savings for a down payment, your plans might fall through. Balancing your debt repayment with targeted savings could be necessary to meet your personal goals.
Can you consolidate your debt?
Consolidating high-interest debts into a lower-interest loan or transferring credit card balances to an interest-free introductory period can reduce the cost of your debt significantly. If consolidation lowers your average interest rate or allows you to pay down debt faster without additional fees, it can free up cash that you could direct toward savings.
Money tip:
Be cautious before making this decision. Ensure you can pay down any transferred balances before promotional periods expire to avoid falling into further debt.
How to determine which to tackle first
Deciding whether to tackle debt or focus on building your emergency fund comes down to comparing the interest rates you’re paying versus the potential earnings from savings. Let’s look at a practical example to illustrate how this works.
Say you have an auto loan with a 5 percent interest rate, and you’ve consistently made your monthly payments on time. You’re also considering putting extra cash into a high-yield savings account offering a 4.5 percent annual percentage yield (APY). At first glance, it seems logical to pay down your auto loan first because its interest rate is higher. But it’s not always that straightforward.
Your auto loan contributes positively to your credit profile in several ways:
- It adds to your credit mix.
- It helps maintain longer credit history.
- It demonstrates a consistent payment record.
Keep in mind:
These are all key factors in building or maintaining a healthy credit score. Paying off this type of debt too quickly means losing these benefits prematurely.
On the other hand, putting extra funds into a high-yield savings account creates a stronger financial cushion. Savings can prevent reliance on credit cards or loans when unexpected expenses arise. This protects you from accumulating more high-interest debt in the future. If you change your mind later, you can always apply a lump sum from your savings toward paying down your loan.
Bottom line
Ultimately, deciding whether to prioritize debt payoff or savings doesn’t have to be an either-or situation. For many people, alternating between building an emergency fund and reducing debt proves most effective.
Start with creating an initial safety net. Aim for at least one month’s worth of essential expenses. After establishing this baseline, shift your focus to aggressively tackling high-interest debts, like credit cards, to stop interest from eating away at your finances. Once your most costly debts are under control, build up your emergency savings to a comfortable cushion of three to six months’ worth of expense.
Once you establish a comfortable savings cushion, turn your attention to paying down long-term, lower-interest obligations like auto loans, student loans, or a mortgage. This will help you balance your payments with other financial goals. By strategically alternating your approach, you can steadily achieve greater financial stability while minimizing stress.
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