Pay Off Debt or Save First? There is a Right Answer…


From Podcast #184: Pay Debt or Save First?, the one in which Jesse discusses the importance of true expenses and becoming a debt-eliminating, crazy person.


“But should I pay off my debt or save first?” This is a very popular question.

At YNAB we teach you to break the paycheck to paycheck cycle, get some breathing room, get out of debt and save more money, but is that the correct order? Let’s discuss.

First, true expenses. You have to embrace your true expenses (Rule Two). Why? What about getting out of debt? Do you really want to be setting money aside for Christmas when you’re paying 22% interest on a credit card? I would submit that you could perhaps lower your Christmas budget, but that is about my priorities, maybe not yours.

Would you be saving for an extravagant vacation? I use the word “extravagant” carefully. If you’re in debt, you’re saving up for that true expense, a vacation, could you whittle that down to not be extravagant but just “vagant”? Did you see what I did there? Extra-vagant. I’m not sure if that works, but the question remains: do you pay off your debt or save money first?

Specifically, what you are saving money for is an important distinction. Because we don’t want you going backward—and this is key, so important, it bears repeating—we don’t want you going backward.

This is why, we don’t want you rapidly paying down your debt. I admire your intensity and your excitement. But I don’t want you rapidly paying down that debt and then having some bill come charging down at you like a freight train and you don’t have the reserves you need and it just completely derails you—which messed up my metaphor, because the bill was actually the train, but you get the idea.

We don’t want you to be taking two steps forward and one back. I’d rather have you take one step forward, one step forward, one step forward.

That one step back is devastating, demoralizing—it’s just awful. We don’t want that.

So you save for your true expenses and you’ll be extra careful about what you allow to be a true expense in this time when you are carrying some debt that you really don’t like. Right? Especially the high interest kind. Student loans, mortgage—that becomes a different beast. But you’ll fill that out because you’re prioritizing all of your dollars.

But if you’re sitting there sending a payment to a high interest credit card company, you’ll feel that friction. You’ll be like, “I’ve got to get out of this STUPID debt! It’s KILLING me!” That’ll happen. And then you’ll decide, “Do I really want to go on vacation with this nasty debt biting at my heels all the time?” The answer is probably not.

And that’s when you start to move and you say, “Okay, I’m not going to do the vacation—that’s not a true expense.” But are property taxes a true expense? Yes. Life insurance premiums? Yes. Some semblance of holiday spending? It will happen. You won’t spend nothing at Christmas so there you go—it remains a true expense. So address that, accept it, embrace your true expenses. Embrace it, meaning accept it: “Yes, that’s real. It’s reality. I need to be ready for it.” Car repairs—it’s real, it’ll happen, I’ve got to be ready for it.

True expenses as opposed to the stuff that you could actually maybe do without for a short period of time while you attack your debt with a vengeance. I think you know.

So, what are your true expenses? Set aside small amounts for those, and then when they come you’re ready. Anything extra yes, please, throw at your debt like the crazy, debt-elimination person you are becoming. But as much as it kills you, let that money for your true expenses just sit there, and be set aside for that bill that is coming in three months, to ensure that you won’t have to take that one step back and put it on your credit card. I promise, it will be crushing. Don’t do it.

That’s why the order is as it is. You save—in moderation—first.


Until next time, follow YNAB’s four rules and you will win financially. You’ve never budgeted like this. For more about how to stop living paycheck-to-paycheck, get out of debt and save more money, faster—subscribe to the You Need A Budget podcast today!