If you’re wondering how to save money and pay off debt, you’ve already taken an important step toward a brighter financial future. Both actions will help create more financial flexibility in your life. But you can give your efforts an extra boost with a strategic approach.

Is it better to pay off debt, or save first?

The answer depends on:

• Debt type (secured vs. unsecured, stable vs. revolving)
• Interest rates
• Disposable income
• Savings and financial goals

Here’s a step-by-step guide to balancing your debt pay-offs while contributing to your savings: 

Step 1: Build an emergency fund

If your debt is high and savings are low, start with an emergency fund before tackling debt aggressively.

• Aim for 3 – 6 months of essential expenses.
• If that feels out of reach:
  • Start with $500 – $1,000 or one month’s expenses.
  • Then, shift focus to high-interest debt.
• Once a high-interest debt is paid off:
  • Split that payment: half to savings, half to next debt.

Step 2: Save and invest for retirement

• Keep emergency funds in liquid, low-risk accounts (e.g., savings accounts, CDs).
• Retirement savings should be invested to beat inflation and grow wealth.
• If your remaining debt has an interest rate below 6%, consider investing instead of making extra payments.
• Benefits of investing:
  • Tax advantages with 401(k)s and IRAs
  • Employer matching = free money
  • Compounding growth over time

Step 3: Prioritize debt strategically

Debt types to understand:

• Secured debt: backed by collateral (e.g., car loans, mortgages)
• Unsecured debt: no collateral (e.g., credit cards, personal loans)
• Stable debt: fixed loan amount (e.g., student loans)
• Revolving debt: can be reused (e.g., credit cards)

Focus on:

• High-interest debt (e.g., credit cards)
• Unsecured and revolving debt (e.g., personal loans, HELOCs)

Tip: If you have a 0% APR credit card and an 8% auto loan, pay down the auto loan first—but only if you can pay off the credit card before the promo rate ends.

Step 4: Tackle credit card debt

• Typical APR: 10% – 30%
• Paying off credit cards offers better returns than most investments.
• Benefits:
  • Lower monthly expenses
  • Improved credit score
  • Access to better loan terms or balance transfer options

Tip: Consider transferring balances to a lower-interest card or personal loan to accelerate repayment.

Step 5: Manage student loans wisely

• Private loans: Refinance if rates are above 4%.
• Federal loans: Avoid refinancing unless necessary—federal protections include:
  • Income-based repayment
  • Hardship deferment
  • Loan discharge upon death

DISCLOSURES:

© 2025 The Prudential Insurance Company of America, Newark, NJ. Prudential does not provide tax advice. This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. If you would like information about your particular investment needs, please contact a financial professional.

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