How to get out of debt and start saving

Quick insights

• Whether you can simultaneously pay off debt and save depends on your financial goals and circumstances.  
• Saving $500 to $1,000 may help you avoid incurring additional high-interest debt when unexpected expenses arise.
• The U.S. government offers debt relief programs for government-related debts, such as taxes and student loans.  

Paying off debts and building savings are both strategic financial habits, but is it wise to pursue them at the same time? In some cases, doing both may be beneficial. Ultimately, the answer depends on factors like your overall financial stability and whether you have high-interest debt.  

In this article, we’ll explore potential strategies to get out of debt and save money.  

Is it better to pay off debt or save money?

Deciding whether to pay off debt, save or do both depends on your individual circumstances. If you have high-interest debt, dedicating any extra funds to paying it off as quickly as possible could minimize interest payments. However, without any savings, unexpected expenses could cause you to miss debt payments or even take on additional high-interest debt.  

You may want to consider building a cash buffer or emergency fund—savings you set aside for unforeseen expenses like car repairs—if you don’t have one already. Saving as little as $500 to $1,000 could provide additional peace of mind.  

If job stability is a concern, some people may prioritize building a larger emergency fund of 3 to 6 months of expenses before paying off debts. This fund acts as a financial safety net in the event of loss of income.

How to get out of debt and save money

There are several steps you can take if you want to both pay debts and save money at the same time. The following tips may help you create a strategic plan.

Tally your debts

Before deciding how much money to allocate for debt repayment and savings, it may be helpful to create a list of everything you owe. Gather the following information for each debt:

• Type of debt (credit card, personal loan, etc.)  
• Balance
• Interest rate
• Minimum payment
• Monthly due date

This information is necessary for making strategic choices about which debts to prioritize. For instance, if your goal is to limit the money you pay toward interest, you could make larger payments on any high-interest debts while continuing to make minimum payments on any other debts you have.     

Create a budget

A budget helps you understand how much money you’re able to dedicate to debt repayment each month. If you don’t already have one, creating a budget allows you to see your monthly income and expenses, helping you identify areas where you can cut back.   

Eliminate unnecessary expenses

To maximize the money you put toward debt repayment or savings, you may want to consider areas of your budget you can reduce or cut. It may be possible to save money even if you’re living paycheck to paycheck. Planning your meals around your grocery’s weekly sales, looking for free activities or getting a roommate are some ways to reduce your expenses.  

However, it's not generally recommended to cut certain expenses like retirement contributions, especially if you want to capture any employer match. These contributions are often considered essential for your long-term financial security.  

Categorizing your expenses (want, needs and goals; fixed and variable) is a budgeting fundamental that may help you make more informed choices when deciding where to cut back.   

Prioritize paying down debt

For all debts, the general guidance is to always make the minimum payment to avoid harming your credit score. Your credit score is one factor that impacts the terms you’re offered on any lines of credit you apply for, including the interest rate. Essentially, your credit score may partly determine how affordable borrowing is for you.

The debt snowball method and the debt avalanche method are two commonly used approaches to paying off debts. With both methods, you’ll need to make at least the minimum payments on all debts, but these debt repayment methods differ in terms of the order in which you tackle the debts.   

Here’s how these two methods work:  

• Debt snowball method: Pay off debts in order of the balance amount, from smallest to largest. The debt snowball method offers an early milestone in the debt repayment process, giving you the satisfaction of paying off a debt in full. There could be a snowball effect as you build off this momentum and continue to tackle each debt.  
• Debt avalanche method: Pay off debts in order of interest rate, from highest to lowest. The debt avalanche method may help you save on interest.  

Many banks allow you to set up automatic payments from your checking account to pay your creditors whatever amount you determine.  

Consider debt consolidation

Debt consolidation is a potential way to save money on interest payments and limit the number of debts you need to keep track of. Debt consolidation involves taking out a new loan, which you can then use to pay toward existing debts. If you have several high-interest debts and qualify for a new loan with a lower interest rate, this may be a good option.

Let’s say you owe $2,200 on credit card A and another $1,200 on credit card B. Credit card A has a 28% interest rate and credit card B has a 22% interest rate. Your initial plan is to pay off both credit cards over 12 months.  

But then you learn about debt consolidation and decide to apply for a $3,400 loan with a 12% interest rate. After getting approved, you use the funds from the loan to pay off the credit cards in full. Assuming you pay the loan off within the same 12month period, you’ll have saved $472 on interest payments.    

Look into debt relief

If you have certain government-related debts (taxes, federal student loans and certain mortgages), you may qualify for government debt relief programs that reduce or eliminate them. Contact the government agency that administers the debt to explore your options.  

Unfortunately, there are no government-sponsored debt relief programs for credit card, auto or other types of consumer debt. However, you may be able to negotiate a repayment plan or settlement by contacting your creditors directly.  

Create a savings plan

After creating a budget and making a plan to repay your debts, the next step is to assess your savings goals. An emergency fund is a goal that may complement your debt repayment plan. Having extra money on hand for minor emergencies may help you avoid taking on additional high-interest debt and feel more financially stable.  

Creating a savings plan is a step toward making this goal a reality. A savings plan includes the savings goal, its cost and a timeline for achieving it.  

You can calculate how much you’ll need to save each month to achieve your goal within the timeframe. So, if you wanted to save $1,000 for an emergency fund within 6 months, you’d need to save $166.67 each month.

Open a savings account

Putting this money in a dedicated savings account separates your emergency fund from the account you use for daily expenses and may reduce the risk of accidentally spending it. Many savings accounts earn interest, and opening a savings account won’t impact your credit score.

Researching the types of savings accounts, as well as the features and terms that different banks offer, may help you find the right one for you. Some savings accounts allow you to automate your savings plan, and your employer may offer direct deposit where you can divert a portion of your paycheck into a savings account.  

In conclusion

Saving money while paying off debt may be possible, but whether it’s advisable depends on your financial goals and circumstances. Factors include the interest rate on your debt, job stability and overall financial health. While paying off debt, some people may want to improve their financial stability by saving $500 to $1,000 for emergencies.  

Creating a budget and savings plan, reducing spending and choosing a debt repayment strategy are just a few of the steps you can take to get out of debt and improve your financial circumstances.