Less Debt or More Savings: Which Is Better?

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Deciding between having less debt or more savings can feel like a (literal) flip of the coin. It’s not like arguing over the best candy (there’s only one answer, and it’s Reese’s Peanut Butter Cups). It’s more like arguing over who’s the better basketball player/star of Space Jam: Michael Jordan or LeBron James?

A case could be made for either (don’t @ me Kobe Bryant fans—may he rest in peace). Well, in the Space Jam debate, I guess we’ll have to wait and see, but judging from LeBron’s work in Trainwreck, it seems like it’ll be a close call.

I digress. Let’s put less debt vs. more savings to the test, shall we?

Pros and cons of less debt

Making debt repayment a priority can be great for your credit score as your payment history and credit utilization ratio (i.e., the amount owed) are two of the biggest credit score factors. And who doesn’t want an 800-plus credit score?

But your debt repayment priorities also depend on the type of debt you have. There’s “toxic” (hears Britney Spears) debt like payday loans, high-interest credit cards, car title loans, and others that you want to avoid at all costs, or at least make your highest priority when repaying debt.

Then there’s good debt, which consists of lower-interest debt that can help build your wealth over time—like mortgages, student loans, and car loans. Sure, you’re paying a mortgage, for example, but your home value will hopefully appreciate over time, or you’ll own it outright. With these, if you’re paying at least the minimum on time every month, you’re in good shape.

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Of course, paying as much as possible toward your debt can potentially put you in even better shape. Using a loan payoff calculator to see how extra payments will speed up the debt repayment process for you can help you determine how much you’d be able to afford without breaking the bank.

Pros and cons of more savings

If you focus too heavily on paying off debt, though, and don’t have any type of emergency fund, one accident could completely wipe out all the hard work you’ve done.

Less than 40% of Americans say they’d be able to pay for a $1,000 unexpected expense, according to a Bankrate survey. Many experts recommend saving at least $1,000 in an emergency fund, but three-to-six months’ worth of expenses usually is the sweet spot.

If you’re eye rolling at those emergency fund numbers because you’re a big-time saver, well, good for you. But what’s your debt situation like?

Having a hefty saving but a ton of debt isn’t doing you a lot of good. You’ve got to pay down your debt eventually, and letting it continue to pile on means paying more on interest in the long run. Not too savvy for a self-proclaimed saver.

So what’s the verdict? Less debt or more savings?

The only major no-no would be not saving or paying down debt, just haphazardly spending money as quickly as it comes in like a first-round draft pick who isn’t getting the proper financial guidance (I blame the league) and probably will have to file for bankruptcy. So, like the MJ-LBJ debate, there’s no right answer, though those two could provide some solid financial advice.

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By Casey Musarra

Casey Musarra is a personal finance writer with over a decade of writing experience and a credit score hovering near 800. She has written several hundred articles on topics ranging from taxes to debt-free living. Previous bylines include newsday.com and philly.com.