When you’re trying to pay off debt, it can be tempting to look at the money sitting in savings and think, Shouldn’t I just use this to pay down the debt?
Mathematically, that may make sense.
If you’re paying high interest on a credit card while money sits in a savings account earning much less, putting some of that savings toward the debt could save you money.
But math isn’t the only thing that matters.
How would you feel if your savings account dropped significantly tomorrow?
Would you feel comfortable knowing you still had some money available if something happened?
Or would having very little in savings make you nervous because you know one car repair, medical bill, or home expense could put you back into debt or deeper into debt?
That matters, too.
The goal isn’t simply to pay off debt as quickly as possible. It’s to make progress in a way that helps you stay out of debt once it’s gone.
For many people, keeping $1,000 to $3,000 in savings can be a reasonable starting point while paying off debt. But there isn’t one number that’s right for everyone. Your income stability, upcoming expenses, responsibilities, and the amount that helps you feel financially comfortable should all be part of the decision.
Should You Save Money or Pay Off Debt First?
You don’t necessarily have to choose one or the other.
For many people, it makes sense to have some money in savings while also working toward paying off debt.
Savings creates a buffer between an unplanned expense and your credit card.
Without that buffer, you can make progress on your debt only to have something happen and need to use the card again.
That’s frustrating. It can make it feel like you’re constantly starting over.
Before putting every available dollar toward debt, think about what would happen if an expense you hadn’t planned for showed up next week.
Would you have cash available to handle it, or would you need to borrow the money?
This is one reason planning for expenses before they happen can make such a difference. Many expenses that feel unexpected are actually irregular expenses that weren’t included in the plan.
How Much Savings Should You Have While Paying Off Debt?
There isn’t one number that’s right for everyone.
You may hear that you should keep $1,000 in savings while paying off debt. You may also hear that you should have three to six months of expenses saved.
I don’t think everyone needs the exact same amount.
When I start working with someone who has very little in savings, I generally want to see them build a small cushion before becoming too aggressive with debt payoff. For many people, $1,000 to $3,000 can be a reasonable place to start.
But the number isn’t the same for everyone.
I also want to know:
What amount in savings would make you feel more comfortable right now?
For one person, $1,000 may provide enough breathing room to move forward.
Someone else may feel stressed watching their savings fall that low.
Your circumstances matter.
Your income stability, family responsibilities, home, vehicles, upcoming expenses, and other factors can all affect how much of a cushion makes sense.
So can your own experience with money.
If you’ve lived through job loss, large unplanned expenses, or periods when you didn’t have enough money available when you needed it, having more in savings may provide a level of security that’s important to you.
Is $1,000 Enough in Emergency Savings While Paying Off Debt?
It might be.
For some people, $1,000 provides enough of a cushion to feel comfortable focusing more aggressively on debt.
For others, it doesn’t.
A single car repair, home repair, or medical expense could easily use most or all of that money.
That’s why I don’t believe $1,000 should automatically be the right answer for everyone.
Think about your own circumstances and the expenses you’re most likely to face.
Then think about how you’d feel if your savings dropped to $1,000.
If that number leaves you feeling financially exposed or worried that the next expense will send you back into debt, you may feel more comfortable keeping a larger cushion.
Your Comfort Level Matters
Personal finance isn’t only about math.
It’s also about creating a plan you can actually live with.
You may technically be able to take several thousand dollars out of savings and put it toward debt.
But if doing that leaves you worried every time the car makes a strange noise or an unplanned bill arrives, you may not feel financially secure at all.
Could keeping more in savings mean it takes a little longer to pay off the debt?
Yes.
But paying off debt faster isn’t necessarily better if you’re left without enough of a cushion to handle real life.
At the same time, keeping a large amount in savings while paying significant interest on credit card debt may not always make sense either.
The goal is to find a balance between making progress on your debt and having enough savings that you don’t feel like you’re living on the financial edge.
Should You Use Savings to Pay Off Credit Card Debt?
Sometimes using a portion of your savings to pay down high-interest credit card debt can make sense.
But I’d be cautious about draining your savings just to make the credit card balance disappear.
For example, imagine having $10,000 in savings and $12,000 in credit card debt.
Putting the entire $10,000 toward the card would make a huge difference in your debt.
But what happens if your car needs a $1,500 repair two weeks later?
Without savings available, that repair may go right back onto the credit card.
The balance went down, but the underlying cycle didn’t necessarily change.
Having some savings gives you another option when life happens.
Paying off debt is important, but learning how to stay out of debt matters, too.
You Don’t Necessarily Need a Full Emergency Fund Yet
Keeping money in savings while paying off debt doesn’t necessarily mean you need to stop everything and build three to six months of expenses before making progress on your debt.
For many people, that’s a later goal.
While you’re paying off debt, the immediate goal may be having enough savings to absorb some of the expenses that otherwise could send you back to a credit card.
As your debt decreases and your financial situation improves, you can continue building savings and working toward a larger emergency fund.
If saving consistently has been difficult, it can also help to understand why money you intended to save keeps getting used for other expenses.
So, How Much Should You Keep in Savings?
For many people, $1,000 to $3,000 may be a reasonable starting point while paying off debt, but the right amount depends on your circumstances and what helps you feel financially comfortable.
Think about what could realistically happen in your life and what amount would allow you to handle some of those expenses without immediately turning to debt.
Then consider something that’s harder to put into a formula:
What amount helps you feel comfortable enough to keep moving forward?
You don’t need enough savings to protect yourself from every possible thing that could happen.
But you do need a plan you can live with.
The right amount should give you some breathing room while still allowing you to make meaningful progress on your debt.
And as your finances change, that number can change, too.
The goal isn’t to follow someone else’s formula perfectly. It’s to create a plan that helps you pay off debt without putting yourself in a position where the next expense sends you right back into it.
If you’re trying to balance paying off debt with keeping enough in savings and aren’t sure what makes sense for your situation, financial coaching can help.
We’ll look at the bigger picture and create a plan that helps you make progress while still feeling comfortable with the decisions you’re making.
Ready to create a plan for your money? Schedule a complimentary consultation to learn more about financial coaching and how I can help.
