Should You Save Money If You Have Debts to Pay?

Updated: February 18, 2021

Should you set aside money for your savings if you have debts you need to pay? My straightforward answer is YES.

But wouldn’t it be wise to pay all your debts first (especially credit card debts) and then work on your savings afterward?

By doing this, you’ll pay less on interests and you’ll get to eliminate your debts faster.

Yes, that is true. But personal finance is not all about money, interest rates, and figures; it is also about mindset, positive habits, and personal rewards. My answer is based on these principles.

Let me explain further through an example.

Let’s say you currently have P20,000 in credit card debt which accrues interest of 3% per month.

Furthermore, your monthly earnings and necessary expenses leave you with P5,000 net savings at the end of the month.

By using that amount to pay your credit card debt, you’ll surely be debt-free after 5 months, and you would have paid a total of P964.50 as interest.

plan-a

Now let’s say you only use P4,000 to pay your debt and save the remaining P1,000. This plan will eliminate your debt within 6 months.

Alternatively, you can choose to pay all your debts by the end of the fifth month. With this plan, you would have paid a total of P1,273.63 in interest fees.

plan-b

From a mathematical point of view, Plan A (pay debt, no savings), is the better choice. But if you take into account human nature, Plan B (pay debt, save money), will clearly have more advantages from a psychological point of view.

Saving Money While Paying Debts

Why is it better to save money even if you have debts to pay?

  • The reason why you have debts may be because you don’t know how to save. Plan B trains you to save money which will help you avoid bad (and ugly) debts in the future.
  • You’ll have money in cases of emergency. Thus, helping you avoid getting more into debt.
  • Your debt is being eliminated AND you see your savings growing. That’s two positive affirmations that rewards you psychologically and motivates you to continue.

Previously, I mentioned that your emergency fund can be alternatively used as an investment fund. If we take that principle into practice here and invest the monthly savings on a low-risk opportunity, then you’ll have the best financial scenario.

plan-c

Even though you paid more interest fees, your net worth in Plan C would be P486.83 higher than in Plan A after 5 months. (Can you see how I got to that figure?)

Of course, this is assuming that you will invest your savings in something that will allow it to grow by 10% every month – like using it as working capital for a simple sideline business.

In the article, Become A Millionaire Using The Doubling Method, I mentioned selling eload as one way you can grow P1,000 by 100% in a short time – an easy, low-risk business investment.

The key to making Plan C (pay the debt, invest savings) work is to grow your savings/investment at a rate higher than the rate accrued by your debt.

To conclude, do remember that all of us have different financial situations and different mindsets when it comes to debt. But in most cases, the thing that suffers most when we are struggling with debt is our morale.

Thus, in the end, it doesn’t really matter if you do Plan A, Plan B, Plan C, or any other plan. What’s really important is we find a way to eliminate our debts through a plan that gives us more confidence, self-worth, and the motivation to have financial control of our lives.

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21 comments

  1. Everyone should have a large emergency fund — especially those in debt. Otherwise, how are you going to pay your minimum payments (and everything else!) when you suffer a drop/loss of income? Miss a payment somewhere and you’ll have immediately lost any savings in interest you might have had and THEN SOME as your credit card interest rates skyrocket!

  2. It’s hard to save when you are paying a housing loan. It seems that no matter how much my husband and I earn, we always end up break even. This scenario has him wanting to go abroad so we can pay off the house in a few years. But I always tell him that it’s what loans are for – so you can have a little breathing space! For me, he shouldn’t be pressured to be loan-free. It’s a loan, and not a debt… Although we do have a debt to his parents on a pay-when-able scheme 🙂

  3. Cathy, how is a loan not a debt? I’ve never heard such a thing. And how would going abroad help?

    Regardless, maybe it’s time to slow down a little on the house (assuming you’re making extra payments, right?). While it’s nice to be mortgage free, I detect some serious tension. Don’t be afraid to live a little, so long as it is still well within your means.

  4. mine is only a personal opinion. we should all have savings , regardless if we are in debt or free from it. money should also be within our reach for unpredictable circumstances in the future. 🙂

  5. I always have that question in mind and im so happy after all i found a very dependable answers to all of that. Happy saving ang investing guyz….

  6. really hooked up on your blog lol. I definitely agree with still saving money. That has been my argument with myself. It feels good also to see that you still have some savings.

  7. just landed on the right blog… I’m quickly hooked Sir Fitz, I even included this in my Google Reader! 🙂

    I’m newly married and we intentionally requested for monetary gifts for our wedding. We were so happy to have received much more than what we expected. Immediately, we used up 50% of our wedding “income” to pay for credit card debts and thank God, we were able to settle 2 cards already. We made sure to pay those with the bigger debt balances. It was a big question to settle the other one or just pay it in terms while funding our joint savings account. Your article confirmed we just made the right decision to save while paying for our remaining debt.

    My husband took over finances as he is admittedly wiser with money. But he says I should learn it eventually and handle our budget myself. I’m pretty sure I’ll get there with your helpful tips 🙂

  8. very helpful sir… thank you so much po. my husband and i have a concrete basis/guide/pattern on how pay our debts while earning.

  9. one of my personal mottos in life: NEVER incur loans.. Luckily, i was never put into a situation where i had no choice.. I was always very patient with my money & my savings.. never in a rush to put up a business.. I waited patiently then bought my house in cash. So far, im doing good.. wala akong utang na loob kahit kanino (except my parents).. I have savings, i have emergency funds, some other investments.. and now willing to take some risks with my extra cash.. Can u give me some advice Fitz?

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