How To Save When You’re Also Paying Off Debt

Americans are drowning in debt. As of last quarter, total credit card balances reached an all-time high of $1.28 trillion, with average interest rates on credit cards at 21%, a 44% increase since 2020.

Meanwhile, two-thirds of credit card users who carry a balance report their debt has caused them to postpone or forgo important financial goals, such as building savings and investing for retirement.

If you feel like you’re stuck between wanting to save money and needing to pay down debt, you’re not alone. And you don’t necessarily have to choose. With some strategizing, you can start saving and pay off debt simultaneously.

Start First with a Small Emergency Fund

Rather than pouring every spare penny into debt repayment, first carve out a small cash cushion of $500–$1,000. Think of this as your starter emergency fund.

Why open an emergency stash before paying off debt? Because without one, you’re far more likely to rely on loans or credit cards when an unexpected expense pops up. A single emergency could erase months of repayment efforts and send you spiraling backward.

Pay Off High Interest Debts

Once you’ve got your starter emergency fund in place, send any extra money you can toward your highest interest debt. Here are two of the most popular methods.

• The debt avalanche method involves making minimum payments on all of your debts, then directing any leftover cash to the debt with the highest interest rate. By attacking your debts from top to bottom in terms of interest rate, you’ll save the most money on interest payments over time.
• The debt snowball method takes a different approach. You’ll still make minimum payments on all debts, but instead of targeting the highest-interest rate account, you’ll throw any extra cash at your smallest balance. The idea is that paying off smaller debts will keep you motivated to reach the next milestone.

Don’t Miss Out on Retirement Matching

Many employers offer matching contributions to employee retirement plans like 401(k)s. If yours does, contribute enough to get the full employer match, even if you’re paying down debt, so that your employer will contribute the maximum amount possible.

Many financial experts refer to these matches as the closest thing you’ll find to free money in personal finance, where you’ll effectively earn an immediate, guaranteed return that’s difficult to beat anywhere else.

Think of it as a present-vs.-future budgeting decision. While you don’t have to max out your retirement account right now, you should at least contribute enough to get the full match. Then put any remaining discretionary money toward your debt balances.

Once your debts are settled, you can start contributing more to your retirement fund again.

Work Your Way Up to a Full Emergency Fund

With your high-interest debt paid off and employer match secured, you should begin building a full emergency fund. Ideally, this will be three- to six-months worth of living expenses in an easily-accessible savings account.

When you have a full emergency fund, you’ll be better protected if an emergency expense arises. Think job loss, unexpected medical bills, or any other significant expense that could disrupt your monthly budget.

Saving While Paying Off Debt

After your emergency fund is set, you can begin deciding how much of each “extra dollar” will go toward savings versus debt repayments.

Even if you have debt, saving money is a habit that can prevent you from getting off-track in the future. If you budget for small, consistent savings today, you’ll be less likely to tap into your savings when you have regular expenses like monthly bills to pay.

A good rule of thumb for many families looks like this:

• 50%→needs 
• 30%→wants 
• 10%→saving
• 10%→debt repayment

Make Savings Automatic—Then Treat Debt Like Your Rent

Make sure to schedule an automatic deposit into your savings account on payday. Even if it’s just a few dollars each month, make sure you’re adding to your savings. Then set up automatic payments for your debt, such as your car loan or mortgage.

By paying into your savings first (and making it automatic), you’re less likely to skip a month. You’ll also find it easier to pay off your debts because you’ve trained yourself to view it as another necessary bill.