To Save or Not to Save? Debt is the Question.

Do you have debt? Do you question the effectiveness of your debt paydown strategy or savings strategy? Do you even have a strategy?  For many, it can be difficult to decide whether or not to save and/or invest money while you have debt. 

Photo by  Tom Parsons  on  Unsplash

Photo by Tom Parsons on Unsplash


On one hand, you want to have money for important future goals. Maybe this is for purchasing a home, your children’s education, a future vacation or simply for retirement down the road. On the other hand, you have debt - perhaps a significant amount - and understand you ultimately have no choice but to pay it off.  This monthly obligation can serve as a hinderance to even begin saving and investing your money. 

There are many factors to consider when deciding what to do with your money when you have debt – and each situation is unique to the individual or family. Without a plan that makes sense for your own situation, allocating your funds appropriately to tackle these two tasks (let alone at the same time) can be very challenging. 

Still, letting debt service dominate your financial resources in your working years is not an effective strategy for retirement or even building a savings account. 

Let’s start with some of the basics surrounding debt. Perhaps you have heard debt referred to as “good” debt or “bad” debt. While labeling it as such can be useful, I think it is more helpful to view your debt in a few categories, which you will see in the below graphic. This “debt pile hierarchy” can be interpreted from the top down, with high interest debt being the most important to pay off first. High interest debt is most commonly credit card debt and typically any debt with an interest rate above 10 percent.

© The Johnston Group 2018

© The Johnston Group 2018


Not only is this debt “bad” because it has a high interest rate, but more often than not it was incurred by purchasing items that lose value over time – like a pair of shoes or a TV. Suffice it to say, credit card debt should be kept to a minimum if you are not able to pay it off every month. Other high interest debt should be addressed as soon and fervently as your budget allows. 

The next category is low interest debt. This is usually a personal loan, a car loan, a line of credit, or any other debt that has a single-digit interest rate. This debt is often necessary - yet paying it off should be prioritized next in your paydown strategy. 

The last category is low interest and tax-deductible debt. This often includes home mortgage debt, student loan debt, or business and investment debt. This kind of debt should be acknowledged separately from other low interest debt because of its benefits. Here, you get some benefit from being able to deduct the interest you pay on the debt.  As such, this should be your last priority and should be evaluated against the prospects of investing your money and possibly achieving a higher return. 

Organizing your debt in this manner will help you take an important next step – assessing the capacity and tolerance you have for saving and investing your money. First, start by figuring out what you spend each month, broken down by major categories like housing, food, transportation, etc. You can also classify spending into two broad categories - non-discretionary and discretionary. Non- discretionary cashflows are generally fixed monthly obligations that are required to be met. Examples include mortgage, auto loan, health insurance, food, and utilities, among others. 

Discretionary cash flows are those that can be minimized and ultimately avoided in the event of loss of income. Examples include entertainment, vacations, Netflix (debatable), etc.

The idea is to figure out how much “left over” or discretionary income you have each month after meeting your obligations. From there, you can decide where to allocate the additional funds. I like this infographic (below) that can be used as a reference point for most anyone – whether you choose to invest or simply save the excess.  


At The Johnston Group, we help people address these matters by constructing a personal balance sheet and cash flow statement. This sort of activity provides a clear picture of all your financial resources. With the various technologies available today, you should have no trouble aggregating your assets and figuring out monthly spending. Resources like Mint, Personal Capital, and even your personal online bank account, provide excellent tools that can help categorize your spending.

Again, the goal here is to come up a with an amount you should have left over for allocating to savings, investing or debt paydown. Once you have that figure – maintain discipline by applying systems to help you succeed.

Automatic saving and investing features allow anyone to transfer money to investment accounts, savings accounts, and retirement accounts on a recurring schedule. These are highly effective tools in combating poor financial behavior. This is why features like automatic enrollment and automatic salary deferral increases are becoming so prevalent in 401k and other corporate retirement plans (and rightfully so, as they greatly increase the probability of getting people to save)! Out of sight, out of mind, right?

This will help you build or begin to build your asset base. One of my favorite money “mottos”, widely touted by Rich Dad, Poor Dad author Robert Kiyosaki is “always pay yourself first.” Without going into too much detail, this rule states that you should always pay yourself an amount you know is feasible – whether it is $5 or $500 – from each paycheck, for personal savings or investment. Do this before you address any of your other obligations. It might sound odd, but it can be very effective because it forces you to take an amount for yourself and set it aside. After going through our cashflow exercise, you should be able to come up with a feasible amount for this and tweak it along the way, if necessary.

Finally, it goes without saying you should always have an “emergency fund” that is readily available should you need it. In my opinion, this is an absolute must regardless of the amount of debt you have. Typical amounts for this fund are anywhere from 3 – 6 months’ worth of living expenses. This could be used to meet your obligations in the event of a job loss, a large medical bill, or any other instance that would beg the need for cash. 

No matter your financial situation, don’t let debt be the devil on your shoulder preventing you from setting aside money for personal savings and investment.  Much scarier than addressing your debt paydown and investment strategy is working for years and not having much to show for it.