Paying off debt or saving?

by Adam on October 4, 2012

Focus is important when it comes to growing your pennies. But how do you stay focused on savings goals that typically require you to stay the course for longer than a year, like a newer or a deposit for a house?

Debt + Other financial goals = Wrong?

Firstly I’d like to address the controversy: For some, having any other financial goal when you still have debt is the foolish thing to do. Debt is costly, risky and if you’re struggling to keep focused when paying off debt there’s no room in a budget for other financial goals.


Some personal finance personalities say that in order to make progress with your debt you need to focus on it completely –focus intensely on paying off every last penny as quickly as possible.


But, is this the right strategy?

Certainly from a purely mathematical perspective most debts are costly and it’s unlikely that any money saved is earning more interest than the interest paid on a debt. By saving the money instead of paying off debt the choice comes at a cost. However, you should consider beginning to save for medium term goals like a house deposit even if you do have debt. Whilst you definitely should be focused on paying off your debt, allocating some of your pennies each month to medium term goals has many benefits in helping you stay focused on growing your pennies.

Staying Focused on Medium-term Goals


Extra Emergency Fund

Before you begin paying off debt it is very wise to build up a small emergency fund to stop you having to resort to more debt in the event of a financial problem. But if you’re saving for medium term goals. those savings can act as an extra fund to help bolster your emergency pot of pennies, giving you more security (until you spend those medium-term savings of course).

For me my house deposit savings are acting as an emergency fund because I do not plan to buy a house for another few years. I’m still focused on the fund though:  I found that it was easy to focus on saving because I knew that every penny saved has a double purpose: the potential to help me in an emergence, and as the first steps towards my medium term goal of owning a house.

Medium-Term  Becomes TODAY Quicker Than You Might Think

Sometimes ‘medium-term goals’ quickly become today’s needs: your car might break down beyond repair or an amazing opportunity might come up unexpectedly.  I hate debt as much as the next personal finance blogger but by making a start on your medium term goals today rather than waiting to pay off all debt you will have flexibility: for example you could replace your car take advantage of an opportunity that you might not have otherwise have been able to if you had sent all your extra pennies to tackle your debt. That said, remember to find the right balance and don’t leave your debts completely unpaid for fear of losing your flexibility because there are benefits to being debt free too!

Psychological Boost

Saving for medium term goals has an immediate psychological value: it makes your wishes and dream more real. You may not have a house, but you can work towards having the money for 1% of it, then 2%; You may not be on your round-the-world adventure but you’ll soon have 5% of what you need sitting in a bank account. A few fledgling medium-term savings accounts are amazing at helping you maintain your focus because they give you direction and vision. They can even help you keep focused on paying off your debt because the medium-term saving accounts have begun to make your future debt-free life seem more real. And you know that the sooner you pay off your debt, the sooner you can grow your medium-term savings accounts further!

Ultimately saving for medium term goals is the easiest way to stay focused on growing your pennies:  Thinking along this time horizon can help you remain focused on paying off the debt that is getting in the way of your dreams. It can also make the idea of growing your pennies seem more worthwhile because the future that you are saving for is so soon: medium term savings are only 1-5 years away. Yes, it is true that it would be cheaper to put every penny towards your debt and then start from scratch on medium term goals, but this underestimates the psychology of money management.

Am I wrong? Should you pay off all of your debts before saving for anything else?

Thankfully I’ve never had debt apart from student loans so I’ve not felt the burden of debt yet I have felt what it’s like to begin saving for medium term things and know how great it feels to gain traction on my goals.

What are saving for in the next 1 to 5 years and what helps you stay focused? Let me know in the comments!

{ 7 comments… read them below or add one }

Rightly Knightly

Completely agree that this is the best process.

Most finance bloggers ignore this approach, simply because they’ve not been in debt themselves.

Without a savings pot, if necessary, one would have to increase debt, which can be a psychological nightmare.

Its a great feeling when in debt to know that when you had to pay for something you paid with ‘your’ money, not someone elses.


Yep. V good post. Can’t do anything other than agree with this. Probably comes down to sitting down personally and identifying your ‘bad’ and ‘good’ debts, and paying off the ‘bad’ ones more quickly. Fact also remains that it isn’t always possible to up the repayment on debt, so any extra money sat around is better off being diverted into a savings account than being used to inflate your lifestyle.


I agree. This seems to be the most sensible approach to paying off your debt while building an emergency fund. Great Post!!!!!


Whilst I like this strategy too I’m surprised that there isn’t any disagreement in these comments yet. Dave Ramsey ( has build his whole career and a multi-million dollar business on a premise that you should focus on debt aggressively, even at the expense of medium and long-term goals.

Rightly Knightly

Dave Ramsey is disingenious whereas you are a genious.

Its easy to say ‘pay off debts first’ if you have absolutely no idea about debt. I’m guessing Dave is a debt novice, not that i’ve researched him etc…


He’s lived with debt and then became a millionnaire by following the rules he teaches. It’s interesting hearing your perspective though because so many people are cheerleaders for his teaching in the PF space.

Daisy @ Add Vodka

I love saving, and don’t get super excited about debt payoff. So I just go with the flow when it comes to paying off debt. I make my payments but save the rest. Then again, my debt isn’t high interest or anything , and I have a thousand other financial goals.

{ 1 trackback }

Previous post:

Next post: