When trying to get finances under control, one of the most common questions is whether you should use savings to pay off debt. It’s a great question, but the answer isn’t entirely straightforward. As with all things related to personal finance, it depends on several factors relating to your unique situation. Let’s look at what to consider when deciding if you should use savings to pay off debt.

How Much Debt Do You Have?

If you have a manageable amount of total credit card debt, or you have debt from one larger than average purchase — such as an airline ticket or new tires — you may want to use savings to pay it off in full.  But only if you have enough to cover it without completing draining your savings. That way it’s not hanging over your head and accruing interest every month.

How Much Do Have in Savings?

Where are you on your savings journey? Have you just started setting money aside or do you have a fully funded emergency savings account (enough to cover 3-6 months of expenses) with some extra funds available? If you’re still working toward your savings goal, it’s best to leave your savings alone and continue to let it grow. But if you have a healthy amount saved and using some of it to pay off debt won’t put too much of a dent in it, go for it!

If You Use Savings, How Quickly Can You Replenish It?

You’ve worked hard to save your money, that’s why you want to be careful about dipping into it. If you choose to use savings to pay off debt, how long will it take you to replenish it? Crunch some numbers to figure that out. You’ll also want to calculate how long it would take to pay off the debt making consistent monthly payments above the minimum due. You may find it won’t take too long to pay off the debt and you can leave your savings where it belongs.

Have You Considered Other Alternatives to Pay off Debt?

Using savings to pay off debt is one way to do it, but it’s not the only way. Before you drain your savings to tackle debt, investigate other alternatives. These can  include asking creditors for temporary hardship arrangements, doing debt consolidation, or pursuing a debt management plan. All these alternatives can  help you save money as you pay off debt and allow you to leave savings intact. 

Are You Committed to Staying Out of Debt?

No matter how you end up paying off your debt, unless you’re committed to staying out of debt, it’s only a temporary solution. Take a deep dive into the reasons you ended up in debt and resolvel to stay out of debt going forward. Plan and follow a budget, focus on needs vs wants and if you continue to use credit cards, pay off the balance in full, on time, every month.

If you need help planning a budget, use our living expenses calculator or take our free financial review.