How to prioritize balancing debt and savings

Although there’s no hard and fast rule, you can consider something called interest income vs. interest expense.

To do this, compare the interest rate of your debt (on things such as credit cards, student loans, car loans, etc.) against the interest earned on your savings (on accounts such as traditional savings, money markets, CDs, etc.).

The difference between interest income and interest expense

INTEREST INCOME

  • Traditional savings
  • Money markets
  • CDs

INTEREST EXPENSE

  • Credit cards
  • Student loans
  • Car loans
  • Personal loans

Comparing these two rates allows you to estimate the net financial result of each option.

Interest income vs. interest expense in action

Let’s look at an example. Say you have $10,000 in credit card debt with an annual percentage rate (APR) of 20% and you make a monthly payment of $200. In this scenario, it would take you more than nine years (109 months) to pay off the balance and you’d end up paying an additional $11,680 in interest.

Now imagine you have an extra $200 a month to save or spend on debt reduction. If you choose to increase your payment to $400, you’ll pay off that $10,000 balance in less than three years (33 months) and will end up paying only $3,044 in interest, saving you $8,636 in interest charges. You can use a credit card payoff calculator to determine your total interest paid.

However, that same $200 per month, when deposited in a savings account with a 2% interest rate, could grow to $23,923.37 in just nine years. You can use a savings calculator to see how your savings can grow.

Of course, you don’t need to go all in with either scenario. Splitting the $200 and putting $100 toward debt reduction and $100 toward savings is a completely valid option.

Do some math to figure out what makes the most sense for you. The best approach is probably somewhere in the middle.

How to grow your savings

Set savings goals

Keeping a goal in mind can help motivate you to maximize your savings. For example, if you don’t have an emergency fund, you might opt to start saving for a rainy day. Or, if you haven’t taken a vacation in a few years, maybe plan a weeklong getaway. Learn how to spend less and save money.

Find a savings account with the best interest rate

It’s entirely possible that the rate in your current bank account isn’t your best bet. Do your research and see what else is available in order to maximize your savings. Don’t forget to check out online banks, which may offer higher interest rates than their brick-and-mortar competition.

Consider your unique needs

Be realistic about your goals, but don’t forget to acknowledge your unique needs and preferences. You deserve to find the balance that’s right for you and only you.

NFM-19009AO (12/19)