Is it better to pay off debt or save?
It depends on one number — the interest rate on the debt compared to what the money would earn. A dollar that cancels 24% debt returns more than a dollar that earns 5% in a savings account. But a dollar that cancels 4% debt returns less. The arithmetic is the same in both cases; the rate decides the answer.
The rate test
Every extra dollar you send to a debt avoids the interest that dollar would have accrued. That avoided interest is a guaranteed return, at the debt’s rate, risk-free. If the debt charges more than the savings account pays, paying the debt is saving — at a higher rate. If it charges less, you keep more by letting the debt run and putting the cash where it earns more.
Two worked examples, same extra $200 a month
Credit card at 24% — pay the debt
A $6,000 balance at 24%, minimum $150. Adding $200 a month:
- Saves $4,770 in interest and 60 months of payments.
- The same $200 in a 5% savings account over the same period earns $3,102 in interest.
- Paying the debt returns $1,668 more.
Auto loan at 4% — save first
Same $6,000 balance, but at 4%, same minimum. Adding $200 a month:
- Saves $262 in interest and 26 months of payments.
- The same $200 at 5% earns $836 in interest.
- Saving earns $575 more — and you have cash on hand the whole time.
Three things the rate test does not see
- Emergency fund. If you have no savings at all, even expensive debt should wait until you have enough to cover one month of expenses. Without that buffer, any surprise sends you back into debt at a worse rate — and the arithmetic that said “pay debt first” assumed you would not borrow again.
- Employer match. A 401(k) match is a 100% return on the matched portion, the day it vests. No debt charges 100%. Contribute to the match before paying anything extra on any debt, regardless of rate.
- Psychological weight. Carrying a balance costs attention, not just interest. If killing a small debt frees you to focus, the rate test understates the value of paying it off. The debt payoff calculator compares the two strategies — avalanche (lowest cost) and snowball (fastest closure) — on your own numbers.
Where this goes wrong
Comparing a guaranteed return to a projected one
Paying off a 24% credit card saves 24% with certainty. A stock market return of 10% is an average that hides years of −20%. The rate test works when both sides are certain — a savings account, a CD, a bond held to maturity. When one side is a market return, the comparison is between a known number and a range, and no subtraction can resolve that.
Your own numbers
The debt payoff calculator shows what extra payments save on your debts, and the savings calculator shows what the same money earns at a given rate. Run both with the same monthly amount, and the one that produces a larger number is the answer.