Personal Finance

To Save or Pay Down Debt? Budget for Both.

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On Wednesday I hosted a webinar presentation at MassMutual on the importance of saving – particularly at a young age. During the Q&A portion of the event, one person asked me, with limited disposable income at the end of the month, how he should prioritize debt repayment and savings. “Which should I do first?” he asked.

It’s a great question and when you’re just starting out as a recent graduate, earning a stagnant salary, I know that it’s hard to keep up with your expenses, let alone your student loans, credit card balances and savings goals.

“You’re not going to like my answer,” I prefaced. “But, I think the best approach is a balancing act.” Try to do both, I said.

(’s savings calculator can help you budget for your future.)

Here’s the thing: We often think of saving money and paying off our debt as trade-offs. The same way we think, “If I brown bag my lunch all week, I can afford the concert tickets!” It seems like we have to sacrifice and choose one over the other. But would we ever consider not eating for a month so we could pay our mortgage? Surely we’d find a way to do both. I think that with young adults, saving and paying down debt is often an afterthought, the final obligations we address at the end of the month. And that approach inevitably leaves us feeling like we need to make “either/or” decisions. Either I pay my credit card balance or I save.

Here’s my advice: budget for debt and savings before you budget for all your other monthly expenses. In my view these are the two most important variables in any financial plan. From there you can assess how much house you can afford, how fancy a car you can drive, how big of a cable plan you can afford and how often you can go out to eat.

As far as your debt goes – Know what your minimum obligations are on your student loans and assume that’ll get deducted from your paycheck, just as taxes were. Just prepare for them getting paid every month. And if you have extra money to play with at the end of the month (after saving and paying down your credit cards), put an extra payment towards the principal of the student loans.

Next understand what your credit card minimum balance will be – and multiply that by two or three – and that should be the least to pay towards your credit cards. Paying the entire balance off is, of course, ideal.

Next, shave off five to 10 percent of your take-home pay and put that in a rainy day savings account. I like online checking accounts because they earn relatively more interest than traditional banks and because the money is in “virtual land” it won’t be as easy to withdraw on a whim.

Last but not least, address retirement. If your company has a 401k match plan contribute enough so that you can benefit from the match. If it’s a match of 50 cents for every dollar you contribute up to 5% of your salary, then contribute 5% of your salary. You want to be aggressive in your 20s with both your rainy day savings and retirement savings.While you will earn more money as time goes on, it doesn’t necessarily mean you will be in a better position to save. After all, when we earn more, we spend more. We decide to add kids to the picture. We may decide to add a mortgage or second mortgage to our plates. Saving money, as my older, wiser friends tell me, is so much easier when you’re young because it’s just you to take care of.

So be selfish!

For more on this, check out Saving vs. Paying Off Debts: Which is the Right Choice for this Economy?

Image by Alan Cleaver, via

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