When money’s tight, paying off debt feels like the right move—but it’s not always the smartest one. In some cases, putting your cash somewhere else can help more in the long run. It all depends on your situation and what you’re trying to build. Here are ten times when paying off debt first doesn’t always make the most sense.
When You Don’t Have an Emergency Fund
If you’re focused solely on paying down debt but haven’t built up any emergency savings, you’re setting yourself up for more stress. Unexpected expenses—like car repairs or medical bills—can throw you off track. Having a small emergency fund, even if it’s just $500 or $1,000, can help you avoid going deeper into debt when the unexpected happens.
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When You Have High-Interest Savings Accounts
Before aggressively paying off low-interest debt, consider putting extra funds into a high-yield savings account or short-term investments. Some savings options offer interest rates that outpace the interest on credit cards or student loans. In this case, letting your money grow a little before tackling debt may actually be more effective.
When You’re Eligible for Employer 401(k) Match
If your employer offers a 401(k) match, it’s usually better to contribute enough to get the full match rather than paying down debt faster. That match is essentially “free money” for your retirement, and you’re not going to want to miss out on that. Once you’re contributing enough to take full advantage of the match, then you can focus more on your debt.
When Your Debt Has a Low Interest Rate
Not all debt is created equal. High-interest debt, like credit cards, should be a priority, but if you have low-interest debt, such as a mortgage or student loans, it may be smarter to put extra cash into savings or investments. As long as the interest rate on your debt is lower than what you can earn through other methods, consider diversifying where you put your money.
When You Have Low-Interest or No-Interest Debt
Many people have 0% interest credit cards or low-interest loans. While it’s still wise to pay them off eventually, aggressively attacking them before more pressing financial goals are met (like saving for retirement) may not make the most sense. You may find it more beneficial to put extra cash toward goals that will bring in a higher return, like building up your emergency fund or investing in your retirement account.
When You Need to Improve Your Credit Score
If your credit score is low, focusing on paying down credit cards can help, but it’s also important to make sure you’re paying bills on time. Sometimes putting money toward your bills—such as utilities or rent—can have a bigger immediate effect on your score. Even if your debt balance is large, showing consistent, on-time payments can improve your score in the long run.
When You’re Paying for Health Insurance
Health insurance is one of those must-have expenses that you can’t afford to skip. If you have debt but don’t have health insurance, prioritize securing adequate coverage. Medical bills can pile up quickly, and it’s better to protect yourself now rather than end up with unmanageable debt later. Once you have your coverage in place, you can focus on paying off any outstanding debt.
When You Need to Save for Retirement
While it’s tempting to use extra funds to pay down debt, putting money into retirement accounts is an important financial move, especially if you’re behind on savings. If you’re not contributing to a 401(k) or IRA, consider increasing those contributions first. Compounding interest works best when it has time to grow, so starting early can give you a big advantage over the long run.
When Your Debt Payments Are Already Manageable
If your debt payments are low and manageable, paying down extra principal may not be necessary right away. Instead, you could invest that money in a more fruitful endeavor, like growing your savings or building an emergency fund. If you’re making your payments on time and not struggling, it’s okay to let your debt payoff take a backseat to other financial goals for now.
When You Don’t Have Proper Insurance Coverage
If you don’t have health, car, or home insurance, consider addressing these gaps before paying down debt faster. Insurance helps protect you from major financial setbacks, which could lead to more debt in the future. Having a solid insurance plan in place helps you manage risk and avoid unexpected financial hardship, making it a priority over extra debt repayment.
Know When to Balance Debt with Other Priorities
Paying off debt is important, but it’s not always the smartest move to prioritize it above everything else. Sometimes, putting extra funds toward building savings, investing for the future, or securing insurance can pay off more in the long run. Assessing your full financial picture, rather than just focusing on debt, can lead to a more secure financial future overall.
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