Should I Save or Pay My Debt Off First?

Welcome to The Finance Gym Action Plan for a Better Life with Money video series. My name is Stacey Powell, and if you’re ready not just to know better but do better with your money, you’ve come to the right place.

Lately, we’ve been talking about the four letter word “debt”. How to stop using debt. Today I’m going to talk about how to, both, stop using debt and how to pay off your debt. I get asked this all the time. Now should I pay all my debt down first and then start saving? And in fact, if you watch Dave Ramsey, he says to save $1000 and then do nothing but pay down debt whether you have $5000, $20,000, $60,000.

I disagree. I think that it’s really important that you pay your debt down at a rate somewhere equal to what you’re saving. Because if you don’t have savings set aside, it’s like Groundhog’s Day all over again. Emergencies are going to happen. They are always going to happen, and you’re going to need a way to pay for the emergency. If you made a commitment to stop using debt, but you have an emergency, and you have to keep going back to the credit card, energetically, it just doesn’t work. We all think a lot harder about what our options are when we have to take money out of our emergency savings account than if we just pull our credit card out.

It’s something like needing a root canal and you don’t have savings. Well, I’m certainly not going to tell you that this is the moment to absolutely stop using your credit cards. But if your TV breaks, stop watching TV for a while. If your tires go bad, well, you know what? Maybe it’s time just for a couple of months to put used tires on or take public transportation or borrow somebody’s car. There are always options out there and we look at the situation differently when we're using our savings account rather than our credit card or getting the help from some other place.

So my recommendation when it comes to paying down debt and saving is: if you’re paying $500 to bills, put $500 into savings. Make sure you’re building your savings at a rate somewhere equal to the amount that you’re paying your debt down.

As always, these things aren’t easy to do on your own. If they were, you would have done it by now. I would love it if you would join us. We have a support group on Facebook called Team Do Better. It’s private. The only people that are in there are people just like you who are ready to do something different with their money life.

You can also sign up for our newsletter at TheFinanceGym.com or subscribe to our YouTube video series right here and be sure to watch next week when I give my one last final great tip about how to get out of debt.

The Big Scary: Talking About Money

We don’t talk about money in our society. We’d rather talk about our private medical conditions or sex lives. We’re reticent to share the good news, lest we sound like braggarts, and we certainly don’t share the bad news. It’s our little secret. We see our neighbors look so financially successful with new cars, home remodeling projects and exotic vacations all the while worrying about our money and wondering why it seems so easy for others. 

One silver lining of the recent Great Recession is that many people had to start talking about their financial woes. Prior to the crisis, many thought they were the only one with money problems. They assumed their neighbors and coworkers with their new cars, bigger homes and exotic vacations could afford them. They thought it was only them struggling financially to ‘keep up with the Jones.” 

None of us were prepared to talk about the realities of our financial situations and the potential consequences of living beyond our means. We were the only one we knew that ever paid a bill late, the only one to have mounting credit cards debt looming over our heads, because no one else was talking about their truth. 

As more and more people reached their financial breaking point, often in the most visible way possible, losing their homes, we all started to realize the prevalence of financial struggles surrounding us. People began to talk more, the media began telling more stories and many began to realize they weren’t alone. 

The majority of us don’t even talk to financial professionals. Only 21% of us households in the United States use a financial planner. And while many more use financial professionals to file our taxes, that interaction rarely includes conversations about our spending, earning and savings habits. It’s unfortunate that tax professionals rarely take advantage of the opportunity to talk to us while they, once a year, have a magnifying glass on our finances. 

Because we haven’t built a comfort level of talking about money, we struggle to talk and teach our children. As our parents grow older and end of life financial conversations become pressing, for many it is still a subject that is taboo and difficult to broach. 

Over the years I’ve held Finance Boot Camps that put people in small groups and have them talk about, and work on, their financial issues. In the first few sessions of each group there is a lot of fear of sharing, but as time goes on and each member shares a little more, a comfort level builds and people break away from their fear. One of the most exciting moments of the groups is when I can hear someone who previously believed they “were horrible with money” step up and offer great advice based on something they’ve done well in their financial lives. It’s the moment that talking about it with others helps us begin to see that how we do our money is like everything else in our lives; some parts we do well, and others we need help. 

Where do you seek help with your money issues?

-Stacey Powell

Finance Gym offers personal finance coaching in professionally facilitated peer-advisory groups. 

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