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by Gary Foreman
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When you’re trying to pay down debt while also building savings, it’s common to wonder which should come first. We spoke with a Certified Financial Planner to outline the factors that can help you decide whether to prioritize paying down debt or saving money.
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Should you pay off debts or build an emergency fund first? That’s a frequent question. We reviewed guidance from Donald F. Dempsey, a fee-only Certified Financial Planner in South Burlington, VT at Dempsey Investment Management, LLC, who explains when each approach makes sense.
Mr. Dempsey offered several practical points about balancing debt repayment and savings. Below are his main observations, edited for clarity.
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Q: From a purely mathematical perspective, paying off debt often looks best. Yet you’ve said there are exceptions. Can you explain?
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There can be a psychological advantage to holding cash instead of relying solely on available credit. Is that accurate?
Mr. Dempsey: Yes. Having cash on hand feels safer for many people. The key is to treat an emergency fund as protection—not discretionary spending.
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With practical tips and tools, you can start an emergency fund even on a tight budget.
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Q: Why might contributing to retirement accounts be an exception to paying down debt first?
Mr. Dempsey: Employer matching and tax advantages can make retirement contributions a priority. For someone in a higher tax bracket, reducing taxable income matters. Each client’s age, income, debt ratios and job security change the recommendation. It’s about balancing risk, return and individual circumstances.
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Q: Is there value in repaying debt and saving simultaneously, such as a split strategy?
Mr. Dempsey: Yes. A balanced approach makes sense—capture employer matches, lower taxable income, and keep some cash for emergencies while attacking high-interest debt. Young people might avoid aggressively prepaying low-rate mortgages while prioritizing high-rate credit cards. Older clients with ample liquid assets might choose to pay lower-rate debts instead.
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Q: When paying debts, should you always prioritize the highest interest rate? Or might other factors change that order?
Mr. Dempsey: I often focus on high interest rates, but there are times to prioritize smaller balances for psychological wins. For example, paying off a $5,000 balance at 10% might be more motivating than slowly chipping away at a larger $10,000 balance at 12%. Momentum can help you stay on track.
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Q: Any final guidance you give clients deciding whether to repay debt or save first?
Mr. Dempsey: I review their full situation—age, income, tax status, job stability, and goals. There’s no one-size-fits-all rule. Often the best plan balances debt repayment with saving and takes advantage of employer matches and tax benefits where appropriate.
[/et_pb_text][et_pb_text admin_label=”Related Bulleted List” _builder_version=”4.19.5″ text_font=”|600|||||||” text_text_color=”#494949″ text_font_size=”24px” text_line_height=”1.4em” link_font=”||||||||” link_text_color=”#003366″ ul_font=”||||||||” ul_text_color=”#000000″ ul_font_size=”22px” ul_line_height=”1.2em” custom_margin=”||28px|||” text_font_size_tablet=”” text_font_size_phone=”” text_font_size_last_edited=”on|desktop” global_module=”2133″ saved_tabs=”all” global_colors_info=”{}”]Related:
- Debt Consolidation: Is It a Good Deal?
- 8 Reasons You Don’t Have an Emergency Fund
- How Much of an Emergency Fund Do I Need?
- 6 Legit Ways to Pay Off Debt Quickly
- Where Should You Start with Debt Repayment? Smallest Bill or Highest Rate?
- Finding Money for Savings While Paying Off Debt
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Reviewed January 2023
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About the Author
Gary Foreman is a former financial planner and purchasing manager who founded TheDollarStretcher.com and its newsletters in 1996. He is the author of How to Conquer Debt No Matter How Much You Have and has been featured in several personal finance outlets.
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