Should I Pay Off Debt, Save Money or Invest?

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You’ve got some cash and you’re facing a financial decision: Should you invest, pay off debt or save that money in an emergency fund?

It may not be a binary choice, money expert Clark Howard explains.

In this article, I’ll help you understand why Clark thinks it’s still important to save money even while you’re paying down debt.

Table of Contents

Debt vs. Savings: Which Takes Priority?

The word “debt” is synonymous with “evil” within some financial communities.

Debt can be a financial and emotional drain. Paying it off can be such a good feeling that media members and communities that focus on paying off debt often develop passionate followings.

But have you ever stepped back and asked: Is it better to invest, pay off debt or save?

Rational people can argue that you should use every spare penny to pay off your debt. After all, you know that you’ll have to pay back your debt, but you don’t know when you’ll incur unexpected expenses.

In isolation, the math often supports paying off debt over saving money and over investing.

But Clark thinks setting priorities should take human behavior into account rather than math alone. He wants you to save and pay off your debt simultaneously. Then you can focus on investing for retirement.

“I disagree with the strategy of focusing solely on paying off other debts instead of having any savings,” Clark says. “I’ve always felt that you should try to do both at the same time even if it means that you pay off your debt slower.”

Avoid Paying for Unexpected Expenses With Credit Cards

The primary reason to build up some savings (even if you’re in debt) is to avoid paying for unexpected expenses with a credit card that you can’t pay off.


“It’s important to have some amount of money in savings so that when the ‘oops’ happen — and ‘oops’ always happen — that you have some money there so you’re not always chasing your tail,” Clark says. “Human behavior being what it is, someone will have no savings and they’ll be concentrating totally on paying off their debt, and then something will go wrong.

“I don’t want the mentality to be, ‘Uh-oh, our water heater broke. I don’t have $350. I’m going to pull out my credit card.'”

All debt is not created equal. Paying 6% interest on your federal student loans isn’t the same as paying 20% interest on credit card debt.

Credit card debt can become especially onerous over time, as companies tempt you with low minimum payments to extract as much interest as possible. Using a credit card to pay for an unexpected expense can end up being much more expensive than the initial price tag.

Also, let’s be honest: Debt is stressful and requires discipline to pay off. Working hard for weeks or months, only to add hundreds of dollars back to your debt, can be discouraging even for the most disciplined among us.

Debt vs. Savings: What’s the Right Ratio?

So now you know that you should be paying off your debt and saving.

But you might still be wondering, what percentage of every dollar should go toward debt vs. savings?

The best ratio for you probably depends on what type of debt you have. If you have a large amount of high-interest credit card debt and two months of expenses in an emergency fund, you may want to prioritize paying down your debt.

If you have low-interest debt but just $50 in savings, you may want to prioritize increasing the amount of money you put in your emergency fund.

“Steadily build up money in reserve. You can do it 50/50. You can do it where, out of every dollar you have, you put two-thirds toward debt and one-third into savings,” Clark says.


“There’s not a perfect ratio of how much you put into each. But do both, not one or the other.”

The Case for Draining Your Emergency Fund

Clark is a big fan of behavioral economics. Reality doesn’t play out on a spreadsheet. Emotions and unexpected events come into play. But for a moment, let’s pretend life happens in a vacuum. We start with you having $1,000 in your savings account.

You find a high-yield online savings account that pays 5% APY (much better than the average savings account interest rate of 0.59% in October 2023). Keeping your $1,000 in the high-yield savings account will net you $50 in interest in the next 12 months.

Let’s say you also have $1,000 in credit card debt at 20% APY. And for the sake of simplicity, let’s pretend there are no monthly minimum payments. Taking $1,000 and paying off your debt instead of stashing it in a savings account will help you avoid accruing $200 in interest.

Do you see the difference?

Savings: +$50

Credit Card Interest: -$200

If you look at the math, it makes more sense to pay off your debt first almost every time.

That equation has changed somewhat as the Fed has raised interest rates from virtually zero to a target rate of 5.25 to 5.5% as of October 2023. Your savings account, CDs, and money market funds are offering good rates at the moment.

Still, those rates don’t compare to what you’ll pay on a high-interest credit card.


Clark points out that many people who don’t have savings to pay for unexpected expenses end up turning to their credit cards. And that can lead to racking up high-interest credit card debt. This is why — despite the math — you need some savings to avoid relying on credit cards.

Should I Take a Company 401(k) Match Before Saving?

Yes. Always contribute enough to your 401(k) to get the company match, even before saving in an emergency fund or paying off debt.

It may take longer to check those two boxes. But that’s OK.

You likely won’t see the money until you’re in retirement, but getting free tax-deferred money is worth the delayed gratification.

“You always want to put into a 401(k) at least enough to get the match,” Clark says.

“That’s free money. It has always befuddled me when people don’t pick up the free money. How often in life is there free money to take with no scam involved? It is truly free money for you.”

The few exceptions: If you’re facing bankruptcy, you’re going to be evicted or you’re going to have your car repossessed, addressing that problem should take precedence over contributing to your 401(k).

What Else Should I Do?

Remember, the first step Clark recommends is to live on less than you make. The better job you do at that, the easier it will be to save money and pay your debts.

If you want a few dozen ideas on how to reduce your expenses, the team has you covered.

Once you’ve built your emergency fund and paid off your non-mortgage debts, it’s time to focus on investing for your retirement.


Hopefully, you’re taking advantage of the 401(k) match program through your employer if that’s on the table.

Clark also wants you to put your investments on autopilot by setting up transfers to occur monthly or every time you get paid. He recommends that, over time, you slowly increase the amount you’re contributing to your retirement investments.

Clark’s first recommendation for investing is to put your money in a target date fund. Read more about the best investment companies and whether you should invest on your own or outsource your portfolio.

Final Thoughts

There aren’t many one-size-fits-all solutions when it comes to personal finance. This applies to paying off debt and saving as well.

The main thing Clark wants you to avoid is paying for emergencies with a credit card that you can’t pay off.

Because every circumstance is different, Clark tends to be careful about declaring hard-line rules with amounts and percentages. But he thinks it’s a good idea to save and pay off debt simultaneously.

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