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Pay down debt or save? 5 questions to help you decide

You probably know that carrying too much debt for too long isn't good for your finances. And you may also know that you should have money put away for emergencies and other important goals. So how do you decide what's more important—paying down debt or building up your savings? To figure out the best steps for you, consider these five questions.

1Do you have high-interest debt?

Interest rates on credit cards are often high. That can cost you considerably over time, since credit card interest typically accumulates faster than what you can earn on savings.


The average annual percentage rate, or APR for credit cards

1.06% **

The average 5-year CD yield

*, As of September 21, 2022

**, As of November 21, 2022

Pay it down

If you're carrying debt with double-digit rates, it may make sense to prioritize paying it off so you can free up future funds to save or pay other debts.

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2Do you have an emergency fund?

An emergency fund provides cash you can draw on in case of:

  • Unexpected car or home repairs
  • Medical emergencies
  • Essential costs like rent and groceries if your income decreases or you lose your income

Emergency fund = at least 3 months

Save it up

If you don't have three months' worth of living expenses set aside for emergencies, consider that goal next. But keep paying at least the minimum on any loans and credit cards. You can take simple steps to jump-start your emergency fund.

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3Are you planning for retirement?

Your retirement account earnings may produce earnings of their own, so the earlier you start to save, the more growth potential you have. Plus, some retirement contributions help you minimize taxes.

Save it up

You can’t borrow for retirement, so consider this goal next. As you build your retirement accounts, you can continue to chip away at debt at the same time.

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4Do you have other debts?

Are you paying off car loans or student loans?


Average student loan debt for class of 2022 graduate:

*Department of Education

Pay it down

If your rates and terms are reasonable, you may decide to stay the course with your monthly payments. For loans with higher rates, consider bumping up your payments to pay those debts faster. That way you'll save on total interest paid and have more money to allocate to your goals.

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5What are your other goals or needs?

If your high-rate debt is under control, you have savings in an emergency fund and you are contributing to your retirement, it’s time to consider saving for other things.

Save it up

Depending on your goals, you can save for: A new car, education or a down payment on a home. Once you have those up and running, you can look toward the fun stuff like vacations and other big purchases.

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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America Corporation and/or its affiliates assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. ©2023 Bank of America Corporation.

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