Should I use my savings to pay off my debt?

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September 17, 2018

If you’ve ever followed along with Dave Ramsey’s Baby Steps in an effort to achieve financial freedom, you know how critical it is to get out of debt as quickly as possible. In fact, it’s the second step (out of the seven) after saving up $1,000 for an emergency fund.

It’s pretty common for people to enter into the Financial Peace journey with a lot of debt AND a lot of savings. For many of us, it’s hard to fathom halting on saving money for a while to solely focus on paying off debt, so we often put money toward both. However, with the debt snowball method and laser focus, the debt will disappear much faster if you throw all extra money its way.

Along with this idea, a common question that gets asked a lot is - “Should I use my savings to pay off my debt?”

The short answer that you may not love —

Yes.

And here’s the longer explanation:

If you’ve got more than $1,000 in savings, you should consider taking all but $1,000 and put it toward your debt. (Especially if you’ve got enough to pay off your debt completely.) ((PS - feel like $1,000 is absolutely too scary to let your savings get down to. Read Dave Ramsey’s explanation here as to why he suggests this amount.)

I know. It’s a bit of a scandalous idea.

The reason being that the next Baby Step once all debt (other that mortgage) is paid off is to build your emergency fund to cover 3-6 months of expenses. So now that you’re out of debt (or you’ve knocked a ton of it down and are going to knock the rest of it out with your debt snowball), you can take all of that money you were putting toward debt payments and throw it into that fund and it will build incredibly quickly. And the faster you do this, the faster you can start focusing on retirement, investments, etc.

I know the Baby Steps can be difficult to wrap your mind around, but these small and simple (not easy, but simple) steps really do work. They take something giant like financial freedom and break it up into bite sized pieces that everyone can accomplish. So if you’ve found yourself chasing your financial tail for awhile now, consider giving this strategy a try.

PS - having a hard time even figuring out how much money you’re actually spending? Grab my free budget template below and start telling your money where to go instead of the other way around!