Debt Payoff or Saving—Which Should You Tackle First?

It’s not uncommon to work toward more than one financial goal at the same time. If saving and debt payoff are both currently on your plate, you may be trying to gauge whether it’s possible to accomplish them in tandem. Or, if you’ll need to invest your time and energy into one before tackling the other. Use this guide to better understand your options so you can juggle financial goals with confidence. 

What to consider  

1. Current savings

75% of people don’t have an emergency savings fund.1 These funds are a safety net to pull from when life throws you the unexpected. While you’ll hopefully never have to use them, having the option to do so will ensure you don’t get buried financially.

Picture this: you drain your savings or overlook them to focus on debt reduction. Everything is finally paid off — then suddenly, you break your arm and wind up in the emergency room. While you’re not in debt, you don’t have the funds to cover this emergency and may land back where you started.  

If the scenario above makes you sweat, it’s time to abandon the financial tightrope act and move to solid ground. An emergency fund can provide you with the stability you need to face obstacles and rebound from them. If you’re starting from zero, it may be wise to build at least a month’s worth of living expenses before turning your focus toward debt. Individuals with an established nest egg, on the other hand, should start chipping away at any high-interest debt. Note that the concepts above do not apply to loan payments on your home or vehicle. These should always take priority to ensure your assets remain in your possession. 

• Tip: Take your savings to the next level and earn off any balance with General Electric Credit Union’s (GECU) Thrive Money Market account!² There’s no minimum to open, no monthly fees, and a tiered-earning structure that rewards you as your balance grows. Give your savings the boost they need and open a Thrive Money Market account online in minutes.  

2. Type of debt 

As previously mentioned, secured loans should always take priority when budgeting. Missed loan payments can: damage your credit, cause you to incur interest charges or fees, and put you at risk of asset repossession. 

Other borrowing products, like credit cards, are typically not secured by collateral. Lenders will assign a higher annual percentage rate (APR) to these products to offset the greater risk they’re taking on. If you miss a payment or carry a balance over, they’ll tack on interest based on this APR.  

While a high APR can cause debt to snowball over time, take caution in making unsecured debt your top priority. If both your auto loan and credit card payment are coming due and you only have the funds for one, choose the former. Though interest will accrue on the card balance, you won’t have to worry about your lender going after your ride.

3. How much debt you have

A debt-to-income (DTI) ratio over 36% is considered high.3 If yours is over this, it’s time to review your spending habits to see if there are categories you can cut spending in. Then, look at your savings. If you’d like to save more but your emergency stash is looking good, now is the time to direct more of your future income toward debt reduction. But again, if you have no funds for a rainy day, try to work toward growing a months’ worth of expenses prior to tackling debt. 

As well, you may want to look into debt consolidation. A professional can explain what solutions are available. For example, a balance transfer to a low-rate credit card allows you to consolidate all of your high-interest credit card debt, effectively making payoff more affordable and manageable. 

How GECU can help

If building an emergency savings fund and keeping an eye on high-interest debt are both important, which one should you do first? The answer lies in what’s realistic for you and where you’re starting out. For guidance, GECU members have access to our Debt Management Assistance program. One of our professionals will review your situation and explain the options available to you. With their help, you can establish a budget, consolidate debt, improve your credit score, and much more! Contact us today to learn more.