A commonly asked question many people face is whether it makes more sense to save money in a savings account or pay off their debt.  To really calculate the answer to this question, you would need to determine how much interest you were earning on your savings and how much interest you pay on the outstanding debts.  The common sense answer is that if the interest rate you’re paying on your debts is higher than the interest rates you receive on your savings, it makes more sense to concentrate on paying off debts before saving.

The problem is when you put all of your money towards your debt and then an unexpected expense or emergency happens.  Because you haven’t put any money aside into a high yield savings account you end up using a credit card, loan, or borrowing money in order to pay for the unexpected expenses or emergency.  Adding to your debt will prevent you from ever getting out of debt.

Instead of skipping your savings all together, it would be a good plan to pay just the minimum payments on your debts from a few months while you build up a savings account.  The purpose of having money in the account is so that while you are concentrating on paying your debt off, if an emergency or unexpected expense should happen you can pull money from the savings rather than add to your debt by using credit cards, a loan, or borrowing money from a friend or family member.

Many financial experts recommend saving a good 6 months of living expenses, but since paying off your debt is a higher priority and it would take a long time to save that much money – you should focus on getting $1000 in the bank.  Once you have this cushion of cash, you can start concentrating on paying off yoru debts as quickly as you can.  Start with the highest interest debt and pay it until it’s gone.  Once you’ve paid off an account, you’ll have that much more money to apply to one of your other debts.  If you should have to use your $1,000 reserves – take a time out from sending all available cash to your debts and save until you have replaced the $1,000.