save or pay off debt

Is It Better to Keep Money in Savings or Pay Off Debt?

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Managing finances as a growing family can feel overwhelming—especially when you’re asking yourself, is it better to keep money in savings or pay off debt? Should you prioritize paying off high-interest debt, or focus on building savings? In this article, I’ll share practical strategies and personal insights from my own financial journey to help you decide what’s right for your family.


Start With Stability: Build an Emergency Fund First

Why It’s Important

Before aggressively tackling debt, establishing an emergency fund is crucial. This safety net protects you from unexpected expenses—whether it’s a car repair, medical emergency, or job loss—and prevents you from accumulating more debt.

At Nesting Finance, we’ve seen the reality of job replacement for high-earning individuals. While higher salaries are desirable, jobs with high compensation can take longer to replace. That’s why, if you’re a homeowner, we recommend having an emergency fund equal to 10% of your home’s market value. If you’re a high earner without a home, consider 12-24 months of living expenses in your emergency fund. If you’re just starting out, start with a $500 savings goal. Build on it from there.

My Experience

When I graduated with six figures of student loan and credit card debt, I immediately focused on creating a small emergency fund. I needed to feel secure, knowing I had a roof over my head and some financial buffer. That gave me peace of mind as I tackled the larger debt repayment strategy.

Actionable Takeaway

  • Goal: Your emergency fund should cover 3-6 months’ living expenses, but for high earners, aim for 12-24 months.
  • Pro Tip: Use a high-yield savings account for your emergency fund, allowing it to grow while being easily accessible. Automate a portion of each paycheck into this account so that your emergency fund grows consistently.

High-Interest Debt: Crush Toxic Debt First

Why Focus on Debt?

When deciding is it better to keep money in savings or pay off debt, high-interest debt—like credit cards or payday loans—should be your top priority. The interest on these debts often costs more than the returns you’d earn from saving. If your debt’s APR is significantly higher than long-term Treasury bonds (currently around 4-5%), paying off debt will save you more in the long run.

My Experience

After graduating, my credit card debt carried a 25% interest rate, and my private student loans were around 15%. I knew I had to prioritize these debts to avoid drowning in interest. I used my first bonus to pay off credit card debt, and then I refinanced my student loans to make the payments more manageable.

Case Study

Consider a family with $15,000 in credit card debt at 20% interest and $30,000 in student loans at 6%. The credit card debt accrues $3,000 annually in interest, while the student loan debt accrues only $1,800. Tackling the higher-interest debt first saves thousands. Once the credit card debt is under control, they can shift their focus to savings or paying off lower-interest loans.

Actionable Takeaway

Step-by-Step Debt Repayment:
  1. Debt Snowball Method: Pay off smaller balances first to gain momentum.
  2. Debt Avalanche Method: Prioritize the highest-interest debts to save the most money.
  3. Pro Tip: Use a debt repayment calculator to stay motivated and track your progress.

Balancing Act: Use the 50/30/20 Rule—or Try Our 35/30/35 Rule for Savings

Why It’s Effective

The 50/30/20 budgeting rule is a popular method for balancing needs, wants, and savings while paying off debt. It divides your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings and debt repayment. While this rule is well-publicized, we recommend a more savings-focused approach—our 35/30/35 rule.

With the 35/30/35 rule, you spend only 35% of your income on needs, keep discretionary spending at 30%, and allocate 35% of your income toward savings and debt repayment. This higher savings rate gives you more financial security in the long run, helping you achieve larger goals like retirement and homeownership faster.

Why Saving 35% Is So Important

To better understand why saving a larger portion of your income is crucial, especially for growing families, read our in-depth article on why saving 35% of your income is key to financial freedom.

My Experience

For me, the magic number was keeping debt payments under 10% of my take-home pay. Once I achieved that, I felt comfortable diverting more money toward savings without risking falling behind on my debt.

Case Study for the 35/30/35 Rule

For a family earning $100,000 per year after tax, they might allocate $35,000 toward needs, $30,000 toward wants, and $35,000 toward debt and savings. By dedicating 35% of your budget to saving and debt repayment, a growing family should be able to manage both goals without sacrificing too much comfort.

Actionable Takeaway

How to Use the 35/30/30 Rule:
  1. 35% to Needs: Housing, groceries, utilities.
  2. 30% to Wants: Entertainment, dining out, hobbies.
  3. 35% to Debt Repayment and Savings: Split this between savings and high-interest debt repayment.

Creative Solutions: Transfer High-Cost Debt to Lower Interest Options

Why It Works

If you own a home or plan to buy one, transferring high-interest debt to a mortgage can reduce your payments and even lower your tax burden. The key is to ensure that mortgage payments remain manageable—typically under 20-25% of your take-home pay.

My Experience

We refinanced our mortgage to cover my remaining student loans. This lowered our interest rate by more than half and made the interest tax-deductible, something we couldn’t do with student loans due to income restrictions.

Case Study

A couple with $50,000 in private student loans at 10% interest could refinance their mortgage to pay off the loan at 6%. This reduces their monthly payment and makes the debt tax-deductible, saving them thousands over time.

Actionable Takeaway

Is Refinancing Right for You? Consider refinancing your high-interest student loans or credit card debt into your mortgage if:
  1. You can secure a favorable mortgage rate.
  2. Your mortgage payments stay under 25% of your take-home pay.
  3. You understand the risks of increasing your home debt.

Contribute to Your 401(k) and Nab Employer Match Money

Why It’s Smart

If your employer offers a 401(k) match, take advantage of it. Contributing enough to get the full match is essentially free money. The compound interest you earn in your retirement account grows exponentially over time, making this one of the few cases where saving should be prioritized over debt repayment.

Actionable Takeaway

Key Steps:
  1. Contribute enough to meet the full employer match (usually 3-6% of your salary).
  2. The sooner you start, the more you benefit from compound interest.

Emotional Side of Debt: Don’t Let Financial Stress Dominate Your Family Life

Why It Matters

Debt can create stress that impacts your relationships and quality of life. Maintaining manageable debt payments—like my goal of keeping payments under 10% of take-home pay—helps reduce stress and focus on what matters.

My Experience

Anytime our finances felt stretched, it affected our family dynamic. That’s why we prioritized creating financial breathing room, even if it meant delaying some goals like paying off debt faster.

Actionable Takeaway

  • Tip: Set debt payment and savings goals that don’t overwhelm you. If you feel like you’re drowning, consider refinancing, adjusting your budget, or trading down to simplify your life.

Focus on Long-Term Goals: Saving for a Down Payment and Beyond

Why It’s Important

For many families, buying a home is a key financial milestone. Once you’ve tackled high-interest debt, start prioritizing savings for a down payment. Building equity in a home can be a smart long-term financial move.

My Experience

Once we had our debt under control, saving for a down payment became our next priority. This gave us stability and allowed us to refinance high-interest debt into our mortgage.

Actionable Takeaway

Key Savings Tips:
  1. Set aside a portion of your income each month for a down payment.
  2. Use a high-yield savings or money market account to help your savings grow faster.

Frequently Asked Questions (FAQ)

1. Is it better to keep money in savings or pay off debt?

  • Pay off high-interest debts (APRs above 8%) before focusing on savings. These debts cost more than you’ll earn in savings.

2. When should I prioritize saving over debt?

  • Once your debt payments are manageable (under 10-15% of take-home pay), shift your focus to building an emergency fund or saving for specific goals like a down payment.

3. Is it smart to refinance high-interest loans into a mortgage?

  • Refinancing high-interest student loans or credit card debt into a mortgage can reduce monthly payments and make the interest tax-deductible. First ensure your mortgage payments are manageable before considering this strategy.

4. How can I balance saving and paying off debt at the same time?

  • Use the 35/30/30 rule to allocate income toward both saving and debt repayment. This ensures you’re working toward both goals simultaneously.

Conclusion: Take Control of Your Financial Future

There’s no universal answer to whether it’s better to keep money in savings or pay off debt first—it depends on your financial goals, interest rates, and personal situation. But one thing is clear: with a strategic approach, you can take control of your financial future. Whether you follow the widely popular 50/30/20 rule or try our recommended 35/30/35 rule to boost your savings, you’re setting your family up for long-term stability.

Remember, every small step you take—whether it’s contributing to your 401(k), refinancing high-interest loans, or adjusting your spending to prioritize saving—brings you closer to financial freedom. The key is to stay committed, make informed decisions, and adjust your strategy as your circumstances evolve. Financial peace of mind isn’t built overnight, but with a clear plan and consistent effort, you can secure a brighter, stress-free future for your family.

Now, take action. Evaluate your current debt and savings situation, and start making those small but significant moves toward achieving your goals—whether it’s reducing debt or saving more. You’ve got this!

Key Takeaways:

  1. Start with an Emergency Fund: Save at least $500, then aim for 3-6 months of living expenses, or more if you’re a high earner.
  2. Tackle High-Interest Debt First: Focus on debts with interest rates over 8% before building significant savings.
  3. Use the 35/30/35 Rule: Balance saving and paying down debt simultaneously with this budgeting method.
  4. Take Advantage of 401(k) Matches: Maximize retirement savings by contributing enough to get your employer’s full match.
  5. Consider Creative Debt Strategies: Refinancing high-interest loans into a mortgage can save money if managed wisely.
  6. Maintain Emotional Well-Being: Keeping debt payments manageable helps reduce stress and allows you to focus on your family’s happiness.

Every small step forward helps you build a secure financial future for your family.


About the Authors: We’re a husband and wife team with over 30 years of experience in finance, investments, and marketing, committed to helping growing families make informed decisions. Think of us as that older sibling who’s been through it before and ready to share our mistakes and successes. Learn more about our journey from insecurity to financial security where we conquered adversity to reach the top 10% of our peers.


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