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Should I pay down debt or save for an emergency?

With the right method and priorities, you can save more and pay off debt at the same time.

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Date:
January 21, 2021
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Paying off debt and saving money are both crucial to a healthy financial life. Paying off debt might feel like the first and only priority, but it’s also important to keep saving regularly, to stay on track for your next milestone. 

Here are two scenarios that can help answer the question, "Should I save more or pay off debt first?"

Scenario 1: Paying off debt first

To make the most of prioritizing your cards, choose a method that makes sense for you. The two most popular methods are called “snowball” and “avalanche.”

With the avalanche method, you’ll target debt with the highest interest payments. That’s the card or loan costing you the most money every month. With the snowball method, you’ll target the card or loan with the lowest balance, then the next lowest balance, building momentum as you go.

But there’s a downside to focusing on debt over saving: if you only pay your debts - and put no money in savings - you’ll fall behind on future milestones and you might not be prepared for a financial crisis, especially if your emergency fund isn’t already filled.


                                                                           Strategies to pay off debts.

Scenario 2 - Focusing on savings first

If you focus only on savings and not on paying off debts, you might end up paying more in credit card interest charges. You’ll earn more interest from your savings account - but not as much as you’re paying on your card’s interest charges. 

When you’re saving, your first priority should be filling an emergency fund, a personal safety net you can use for unexpected expenses. A common rule of thumb is to save three to six months worth of regular expenses. An emergency fund can be a smart alternative to using credit cards in a crisis, especially since you won’t incur interest charges.

How to balance both

Given the cost of interest charges, prioritizing debt payments usually makes sense. But it’s also important to make saving a regular habit - and you can do both.

Make saving a part of your monthly budget, a line item just like rent or nights out. That keeps it a priority, no matter how small your contributions get. When you save regularly, even in small amounts, your money starts earning interest right away. 

Keep your debt payments in balance within your budget, too. Adjust non-essential expenses first, if you need more to pay off debts, but keep your essential regular expenses in tact, like rent or health care. Saving money by paying off debt is important, but you still need to ensure your basic needs are covered. 

Bright does both for you

Your personal Bright Plan can pay off your debts faster - while helping you save more too. With Bright, you can set your own goals, and we’ll help you meet them. 

Your Bright Plan analyzes your spending habits and makes card payments for you, based on what you can afford and what saves you the most in interest charges. 

Your Bright Plan can also move funds automatically from your checking to your Bright Savings Account, learning what you can afford and how best to meet your goals.

With your Bright Plan, you don’t need to prioritize or make tough choices month after month.

Recommended Readings:

Difference between a rainy day fund and an emergency fund

Quick ways to become debt free

Co-Founder & CTO

Varun is a Computer Science graduate from I.I.T Kanpur. He is a highly experienced A.I. engineer and data scientist, with a decade of experience.

Varun is a Computer Science graduate from I.I.T Kanpur. He is a highly experienced A.I. engineer and data scientist, with a decade of experience.

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