Lesson 4 of 5

Balancing saving with paying off debt

A common question: should extra money go to savings or debt payoff? The honest answer depends on the debt's interest rate and where you are with your emergency fund, but a workable default order looks like this: build a starter emergency fund of $500-$1,000 first, then aggressively pay off any debt with a double-digit interest rate, then build your emergency fund out to 3-6 months, then split additional money between lower-interest debt and other savings goals based on your priorities. The logic: a starter fund prevents new debt from unexpected expenses while you focus on payoff. High-interest debt (credit cards especially) almost always costs more in interest than any savings account earns, so paying it down first is close to a guaranteed return. Once that's gone, building out your full emergency fund protects the progress you just made. Lower-interest debt (many mortgages, some auto loans, federal student loans) is more of a genuine toss-up with saving and investing goals -- there's no single right answer, and it depends on your risk tolerance and other goals.