231 | Should I Pay Off Debt or Save First?

Is it better to focus on paying off debt or saving first?

It’s a common question lawyers ask me, and there are a few important things to consider in making the decision.

In this episode, we talk about how to determine whether to focus on saving or paying off debt, including some situations when it’s best to focus on one or the other.

• • the debate between saving and paying off debt

  • the importance of your emergency fund

  • savings vs. debt interest rates

  • planning for known, upcoming expenses

  • the impact of debt on your budget

  • the personal nature of personal finance

Episode 228: How to Get Through the Holidays Without Going Into Debt

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords. By the way, if you’re a lawyer who’s struggling with debt, you’re probably making at least one of five common mistakes. Grab my free guide on how to correct those mistakes and finally get out of debt for good. Head on over to rhothomas.com/guide. That’s G-U-I-D-E.

Hey friend. Welcome back to the show. I hope you’re doing well and having an amazing day so far. So today we are talking about saving versus paying off debt. This is a question that I get all the time, which is, Should I save first, or should I pay off debt first? I have a few thoughts about this. And the typical lawyer answer, of course, is it depends. So generally, it is a matter of personal preference, with a few caveats. The first one being, if you don’t have an emergency fund, then you definitely want to focus on saving an emergency fund, like if you have $0 in savings, or you have very little savings, you want to build that saving so that you have a cushion if an emergency were to come up, or some sort of unexpected expense, or something like that. The reason for that is, if you start paying off debt, but you don’t have any savings, and you have, you know, an emergency or unexpected expense come up, then you don’t have money to cover it, and then you end up having to go back into debt to cover that expense. So by building up an emergency fund, you make sure that you don’t end up in that situation. Standard advice for building your emergency fund is to have three to six months of expenses. And this is the expenses that you’re going to cover in an emergency. It’s not all your expenses. So three to six months of expenses is standard advice. But I have seen people do as little as one month or as much as 12 months, in this case, where we’re looking at saving versus paying off debt, I don’t think you need to build all the way up to six or 12 months of expenses. I think you need to have some kind of cushion, so maybe like one to three months. But beyond that, it might be a little too much. Why do I say that? Well, first, I think 12 months of savings is too much like that’s too much to have in a savings account for me, but it is a matter of personal preference, as I said before, and I know some people feel better having that much in there. But second, and relevant to this conversation, most of my clients debts have higher interest rates than you can earn in a savings account. So especially if you have credit card debt, where the interest rates are like 20 30% you’re not getting that much interest from your savings account. The interest rates on savings accounts are pretty low compared to most debt. Interest rates like savings accounts on the high end are maybe around 5% right now, and that’s as of October 2024, when I’m recording this episode. So if you keep saving past that one to three months and you have debt with higher interest rates, the math doesn’t work out on it. So the money that you’re putting into savings would be better used to pay down your debt, and that debt is costing you money the longer you keep it. Now that’s not to say that you can’t go back and add more to that savings afterward, but you once you have a little bit of a cushion saved, I would turn to paying off debt, especially if you have higher interest debt, like credit cards. Now I’m going to talk more about my rationale for turning to focus on debt after building your cushion, but before we move past the savings discussion, I do want to highlight that if you have expenses that you know are coming up, like you already know about them, you can be planning for and saving for those now. For example, one of my clients is getting married next year, and they are already saving little by little each month for the wedding. I also have multiple clients who’ve been saving little by little each month for the holidays. So when you have those kinds of expenses that you know about coming up, it’s good to be saving for them a little bit like those are just built into their budgets each month. And I talked all about saving for the holidays back in episode 228 so make sure you check that one out if you haven’t All right, so back to paying off debt. Why do I say I would turn to paying off debt once you have a little cushion in place and not keep saving. As I said, this is a matter of personal preference, and I know I’ve been saying personal preference a lot, but, like, seriously, personal finance is personal preference, right? Like, it’s personal but some people would like go ham on their credit cards and just not worry about other debt with lower interest rates and just keep saving. Or maybe they’re investing, which is beyond the scope of this conversation, because I’m just talking about saving in a regular savings account, but for me, it just made more sense to go ahead and pay off the debt. And the thing is, like, when you have a lot of debt and you have a lot of like, minimum payments coming out, it starts eating into the money that you have available for yourself. So I have seen, like, a lot of lawyers who’ve got, like, 1000s of dollars in minimum payments each month. And I’m not picking on them, like I don’t have any room to talk, because that was me too. Like at one point, my husband’s and my minimum payments were $3,500 a month, and that was not including our mortgage. So with the mortgage, it was almost $5,000 a month. And so for us, we were like, Okay, we want to get that money back right. Like, we don’t want to have $3,500 a month going out every single month. And so by paying off our debt, then we freed up that money and we’re able to use it for ourselves. Now I’ve also seen a lot of people where their budget is really tight, and a big part of why that’s happening is they have so much going out and minimum payments, so if they would pay off that debt, then that loosens up their budget some, because they don’t have as many expenses each month. I Yeah, so that’s why I’m a big fan of, like, paying off your debt after you have your emergency fund in place. But like, if you’re in a situation where you don’t have these super high debt payments, and you don’t have, you know, a large amount that’s going out every month for the payments, and your budget doesn’t feel tight, and all of that like you feel like you can comfortably save, you can comfortably do the things that you want to do. Then, by all means, like, go forth, do what you want to do. Again, it comes down to personal preference. But like I said, for me, it just made a lot of sense. For a lot of my clients, it makes a lot of sense, because when you’ve got 1000s of dollars going out in minimum payments, that adds up, and it it makes it where your budget feels a lot tighter than it has to. So ultimately, there is no right or wrong answer, but these are just some things to consider right so like I said, if you don’t have an emergency fund at all, you want to go ahead and build at least some cushion in so that you have that for any emergencies or unexpected expenses. If you know about some expenses that are coming up, then you can be saving for those along the way as well. And then I would turn to paying off debt, especially when you have high interest rates, like high interest credit card debt, or when you have these really high minimum payments every month that’s coming out. And if you need help with paying off your debt, make sure you check out my free guide. You will learn how to correct five mistakes that keep a lot of lawyers in debt, and you can get that at Rho thomas.com/guide All right, so that is it for this week’s episode. Please take a second share this episode with a friend or two who you think could use this information. That is the best way for us to get this information in the hands of lawyers who need it so that they can manage their money better, get out of debt, all that good stuff, all right, and I appreciate your support. As we close out, friend, I pray that you take the information you learn here, apply it in your life and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to regain control of your time, build wealth and live the life of freedom and choice you deserve. Talk to you later.