Managing money often comes down to a big question: Should I pay off debt first or start saving? The truth is, both are important, but the order matters.
Step 1: Build a Small Emergency Fund
Before focusing on debt, set aside some money for emergencies. Experts suggest keeping at least a small amount (around one month of expenses or $1,000) so that you don’t have to use credit cards when unexpected costs come up. This gives you a safety net while you work on your debt.
Step 2: Pay Off High-Interest Debt
Once you have that small savings cushion, shift your focus to high-interest debt, especially credit cards. Credit card interest is often very high, much more than what you could earn from investing. So, every dollar you use to pay down credit card debt saves you more money in the long run.
You can choose between two approaches:
- Avalanche Method: Pay off the highest-interest debt first.
- Snowball Method: Pay off the smallest debt first to get motivated.
Step 3: Don’t Miss Out on “Free Money”
If your employer offers a retirement savings match, try to contribute enough to get the full match, even while paying off debt. This is like free money, and it helps you build long-term savings while reducing debt at the same time.
Step 4: Balance Low-Interest Debt and Savings
For loans with lower interest (like student loans or a mortgage), it may be smarter to balance both—keep paying your loans while also putting money into savings or retirement. Over time, the growth of your savings can be greater than the interest you’re paying.
Key Takeaway
The best plan is:
- Build a small emergency fund.
- Pay down high-interest debt.
- Contribute enough to retirement to get your employer match.
- Then balance saving and paying off lower-interest debt.
By following these steps, you reduce financial stress, protect yourself in emergencies, and steadily build a stronger future.