I hate getting too many opinions on something.

Which car should I buy? Which suit should I wear for the big meeting?

Or how about the big one:

Should I save cash now or pay off my debt first?

The answer to all of those questions is this:

It depends.

It may not be the answer you want to hear, but it’s the truth. Everyone’s situation is different, and when it comes to finances, the stakes are higher.

In this article, I’ll share why it might make sense to save cash before paying off debt. Then, I’ll play devil’s advocate and show you why it might make sense to do the opposite.

Let’s first start with why it makes the most sense to save cash before paying debt.

Why you should save cash before paying off your debt

There are two significant benefits to saving cash before paying down your debt balances:

1. You’ll build an emergency fund

Having an emergency fund is absolutely critical to your financial success. It gives you a buffer in the event something significant happens financially that you can’t quickly come back from. Some of these things include:

  • Job loss. If you lose your job, you lose your paycheck and your medical benefits (unless a spouse has you covered there). This can put a severe dent in your finances—so much so that you may have to sell your assets and dramatically adjust your lifestyle.
  • Home repairs. Owning a home is great, but it comes with costs. When your furnace breaks or your roof begins to deteriorate, you’re going to run into some high, unexpected expenses.
  • Medical emergencies. You can’t always plan for these, but they can cripple your finances. In his book, You Need a Budget, Jesse Mecham talks about a family that had a child with a medical condition. They knew they’d have to shell out a lot of money on medical expenses, so they built up a hefty emergency fund in anticipation. They avoided massive amounts of debt and were able to maintain their lifestyle—all because they planned.
  • Car problems. If you’re someone who likes to drive your car until it doesn’t go anymore (frugal move, by the way), then you’re bound to have some car problems. Having money set aside for these significant expenses is essential.
  • Pets. Anyone with pets knows that they can get crazy expensive. Not only are you shelling out money each month on food and natural needs for your pet, but eventually your pet will have issues that need to be resolved. Vet bills can be costly, and getting your dog groomed isn’t always cheap. And sadly, when it comes time to put your pet down, the costs don’t suddenly evaporate.
  • Unexpected travel. While unexpected travel expenses may not amount to tens of thousands of dollars, you may need to book a flight unexpectedly—such as when a family member passes away, and you have to travel across the country overnight on a whim.

There are all kinds of things that can happen to you financially, and if you’re not prepared, you can put you or your family in a lousy situation moving forward.

So how much do you need?

I’ll let you read our full article on this, but here’s a quote from Amber Gillstrap in that piece:

“At the very least, you should have enough money set aside to cover a big unexpected expense without turning to credit cards. Then, ideally, you would have enough money to get you by in case you lost your job and had to find a new one.”

Overall, though, by holding off on your debt pay down, you’re at least giving yourself a shot at saving enough for a substantial emergency savings account. Imagine what would happen if you threw every dollar you had at your debt and had a significant financial emergency?

2. You’ll maximize your retirement benefits

Each year, you only get one chance to max out your retirement accounts. This includes accounts like your company-sponsored 401(k) and your individual retirement account (IRA).

There are guidelines as to how much you can contribute each year, and once that year passes, you can’t go back in time to retroactively add money.

This means you’re missing out on some of the incredible tax benefits of retirement accounts, and if and when you do save, you’ll be forced to use other mechanisms like cash savings or taxable investment accounts.

And we’re still not really saving, either.

Most American’s don’t have a lot save for retirement

In a recent survey done by GoBankingRates, they learned that 42 percent of Americans had less than $10,000 saved for retirement. Even worse, 14 percent of that had nothing saved for retirement. They also found that nearly seven percent had between $10,000 and $49,999 and 13 percent had $50,000 to $99,999.

So about 62 percent of Americans have less than $100,000 saved for retirement.

You need $2 million to retire

That’s a far cry from the $2 million I think we need to retire comfortably. In fact, these people are at risk of retiring completely broke. Here’s what columnist Cameron Huddleston had to say about this population of people:

“If they don’t boost their savings, they’ll likely retire broke because that’s not enough to cover a year’s worth of expenses. On average, adults 65 and older spend almost $46,000 a year, according to the Bureau of Labor Statistics.”

Scary, right?

This number gets even worse for Millennials. The survey found that nearly 57 percent of Millennials had less than $10,000 saved for retirement. With Social Security becoming less and less guaranteed for this demographic, I’m not sure what the long-term plan is here. I suppose they’d have to continue working.

Open a 401(k)

The first thing you need to do (if you’re employed) is to sign up for your company-sponsored 401(k). More than likely you’ll be auto-enrolled, but in case you aren’t, talk to someone in HR to get this set up right away.

The current maximum contribution for 401(k) accounts is $18,500 per year—it was just recently raised this year from $18,000. Remember, this is pre-tax money, so if you can manage to have that much taken out of your paycheck, then go for it.

If you need help managing your 401(k) you can use our favorite optimization tool—Blooom. Blooom analyzes your 401(k) and helps make sure you’re invested in the right areas to meet your personal retirement goals.

Learn more: See details/apply and get $15 off your first year of Blooom with code BLMSMART or read our complete Blooom review.

Also, open an IRA

For most people, the ideal IRA is a Roth IRA due to the tax benefits it provides during retirement (you don’t pay taxes on withdrawals since you put the money in post-tax).

Another option is a Traditional IRA. You put money in post-tax, but you can deduct the contributions at tax time (effectively making it a pre-tax contribution), but you pay tax when you take the money out. Basically, it comes down to whether or not you think you’ll earn or withdraw more money in retirement than you do now.

2018 rules allow you to contribute $5,500 to an IRA (again, this is post-tax money). Like a 401(k), once the tax year passes, you’re no longer eligible to contribute money toward that goal for the year.

My advice

My advice is first to max out your 401(k), then an IRA, then (if you have money leftover) put the rest into padding your emergency savings or into a taxable investment account.

Why you should pay off debt before saving

Look, I’m a realist, and I understand that what might work for some won’t work for others. I have a student loan, but I’ve elected to dump cash into an emergency savings account before paying that off for many reasons.

That may not work for you. You may not want to have that debt lingering over your head. And I get that. So for those of you who want to pay off debt before ramping up their savings, here are a couple of reasons why you’d do it:

1. Debt can be expensive

As of this writing, the average credit card interest rate in the country is 16.71 percent. When you step back and really think about it, that’s expensive. You’re paying nearly 17 percent to borrow money.

Here’s an example

Let’s do some math to show how expensive this can really be. We’ll use the average interest rate on credit cards I mentioned above, and for the balance, we’ll use the average credit card balance in the U.S.—which is $6,375.

The advice you always hear is “don’t pay just the minimum”—but if you read what I wrote above about savings rates, chances are many of us can’t afford more than the minimum. For this, I’ll use a modest calculation of one percent plus finance charges (which is common for banks to use now). This equates to $152.52 to start.

Using this calculator, I came out with this:

So, in paying the minimum payment, it will take me more than five years to pay the balance off, and I’ll end up paying more than $3,000 in interest charges. That’s almost half of the balance I originally started with. Talk about expensive!

The point here is that if you’re carrying debt on a high-interest rate credit card or another loan, and you can’t do a balance transfer or consolidation of any kind, you may want to favor paying off your debt before stacking your savings account.

If I instead paid five percent of the balance as my monthly payment ($318.75 to start), I’ll have the balance paid off in just two years and had paid just over $1,100 in interest, saving me quite a bit of money:

In this situation, it makes sense to put the extra $200 toward debt instead of savings.

2. Debt is mentally and emotionally taxing

In 2012, University of Wisconsin professor Lawrence Berger wrote a paper that showed a link between debt and depression. His research suggested that:

“…household debt is positively associated with greater depressive symptoms” and that the “…findings suggest that short-term debt may have an adverse influence on psychological well-being, particularly for those who are less educated or are approaching retirement age.”

In another research paper, Dr. Fenaba R. Addo, a fellow at Wisconsin-Madison, discovered that

“…credit card debt is positively associated with cohabitation for men and women, and that women with education loan debt are more likely than women without such debt to delay marriage and transition into cohabitation.”

Meaning, debt has an adverse effect on whether or not people choose to get married.

So where does all of this come from? An article in the Financial Post quotes clinical psychologist Ivan Bilash:

“The spend or save, splurge or hoard decision really comes down to confidence about the future or fear of it, says Ivan Bilash, a clinical psychologist who practices in Winnipeg. “The problem is cash myopia—insecurity and a desire for liquidity often go together,” he explains. “If people fear the future, then most of the time they want to maintain cash balances and not squander money on transitory pleasures. On the other hand, people who are secure may be more willing to spend on the pleasures of the moment.”

As research shows, having debt can have a lot of mental and emotional effects on us. Regardless of our interest rates or balances, the mere issue of unpaid balances weighs on us. And it shows in different ways—depression, not getting married, and decreased spending confidence.

Here’s the problem

This problem is perpetuated by common advice to pay off small balances first. This theory was made famous by Dave Ramsey, who coined it the “snowball method.” Ramsey admits that the advice doesn’t make mathematical sense in his book, but it makes psychological sense.

I agree with this, but only to a point.

After we’ve paid off several small balances, we may be left with a couple of large balances—such as a $20,000 outstanding credit card balance, a $50,000 student loan, or a $200,000 mortgage.

While in the short-term, you’ll feel relief knowing you’ve paid off some debt, at some point, you’ll hit a metaphorical brick wall when you’re faced with these massive debts.

Ramsey is right. Mathematically, his method makes no sense. And thus the cycle of debt-related emotional stress continues, or increases.

My advice

My advice here is to tackle debts with the highest interest rate. Data proves that having debt will cause us to have stress regardless, so why not use a method that makes mathematical sense to pay it off as quickly as possible?

How to pay off debt

Get a balance transfer credit card

If you have a large amount of debt that you can pay off in a little over a year, a balance transfer credit card might be the right answer for you.

The best balance transfer cards typically offer a 0 percent APR for anywhere between 15 and 18 months. The Discover it® Balance Transfer is a great example. It offers 18 months interest-free for balance transfers. It also offers:

  • 5% cash back on rotating categories, up to the $1,500 quarterly maximum each time you activate.
  • Discover will match ALL the cash back you’ve earned at the end of your first year, automatically.
  • The standard APR is 

Consolidate your debt

If you’re weary about opening another credit card account, consider getting a personal loan. You can use the loan for anything—which is why it’s a “personal” loan, and, if you have decent credit you can usually get a good interest rate.

Upstart and Fiona (formerly Even Financial) are our favorite personal loan matching sites that can offer you a list of the best loan rates based on your financial profile.

The best solution

I have my own opinion on which focus works best. But that is what works for me. I don’t have credit card debt, a car loan, or a mortgage. So my situation is very different from someone who does.

With that being said, you have to do what works best for you. But the best advice I can give you as a blanket recommendation is to find a balance between these two approaches. I don’t understand when or why we became so extreme with paying off debt or saving as much as we can.

I get that we need the gratification of seeing debts go away or seeing our bank balances skyrocket—that’s a very fulfilling feeling. But it may also leave us feeling empty in another area.

Ultimately, do what works for you. But make sure you’re prepared for emergencies in some way, and make sure you’re not throwing away money on interest.

Summary

Paying off debt is a great idea, but so is saving money in an emergency fund. So which do you choose? That obviously depends on a variety of factors, including: how much you make, how much debt you have, and if you already have any savings.

As you can see from above, which one you choose is up to you. But the best advice: Try to do a little of both.

Read more

  • All Debt Isn’t Created Equal—Our Guide To Good Debt Vs. Bad Debt
  • The Best Way To Consolidate Debt: A Complete Guide