Is It Better to Save or Pay Off Debt?

Mechanic meeting with car owner.

A reader asks: We've been working on paying off our credit cards and have about $1,300 dollars left. We are currently looking at a possible $2,000 car repair or buying a new car depending on potential engine damage. I’m wondering if we should increase our credit card debt or deplete our saved resources to pay this bill. We have about two months of every budgeted bill saved up and no other savings. Should we use this money or add to our debt?

To Pay Off Debt or Keep Money in Savings?

At first glance, the answer may seem obvious. We save money specifically to help manage those unexpected, rainy day expenses. And when the car breaks down, that seems like a pretty rainy day, right?

In reality, the answer is a little more complex. After working so hard to pay off your credit card debts, you may not be inclined to lose all that great progress, but once you use up your savings, it's gone (until you can build it back up again). And while you'd hope that today's car problems are the worst thing you'll have to deal with in the immediate future, there's no guarantee that another unexpected expenses isn't just around the corner. 

So while there's no right or wrong answer, there are a few questions you can ask yourself to make sure you're making the best choice for your situation.

Considerations for Using Up Savings vs. Adding More Debt

Are there bills you can't pay with credit?

The top priority for your emergency savings account is ensuring that your basic needs are met even in the event that your income is cut off. When thinking about the most important bills in your budget (mortgage, rent, electricity, food, etc.) it may be helpful to determine which can be paid with credit and which cannot. 

If a sizeable portion of your most important monthly expenses can't be put on a credit card, you may want to make sure that you've always got enough in savings to handle those payments at least.

How much is your new debt going to cost you?

Carrying debt wouldn't be such a big deal if it wasn't so expensive. The biggest factor in the ultimate cost of a new debt may be the interest rate of the credit card you're using to make the payment.

A card with a favorable rate may make using credit card and maintaining your savings preferable, since the interest charges will likely be manageable. But if your credit options all come with big interest rates, that may a reason to consider using your savings instead. 

How comfortable are you going to feel operating without a financial safety net?

Leaving aside the dollars and cents, you know you better than anyone else. So consider your own feelings, values, and priorities. Would you feel comfortable moving forward without those emergency savings? Would backsliding into more debt be a real blow to your morale?

Everyone has a different relationship with money. Some people need deep cash reserves to feel safe, and some feel pretty confident that they can make it work no matter what. Be honest with yourself and let your heart have a say in the matter.

And if you need a little more personalized advice, MMI offers free, confidential financial counseling. We'll review your bills, your debts, and your goals and help you start making the best money decisions for you and your family.

Tagged in Debt strategies, Psychology and money

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Financial Counseling Association of America Financial Counseling Association of America
    MMI is a proud member of the Financial Counseling Association of America (FCAA), a national association representing financial counseling companies that provide consumer credit counseling, housing counseling, student loan counseling, bankruptcy counseling, debt management, and various financial education services.
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.9/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Department of Housing and Urban Development - Equal Housing Opportunity Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.