How I Paid Off My Debt and Saved at the Same Time

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How to save money while paying off debt

I’m constantly asked how one should pay off debt. It’s extremely hard to answer, because it’s generally based on personal experiences and preferences. That being said, I firmly believe in paying off debt and saving money at the same time. Why? It’s because that’s how I did it and I showed it was possible to pay off all your debt and build yourself a healthy emergency fund. Not only is it possible, but it’s great to start your new financial journey with money in the bank.

As some know, I worked my way through $50,000 worth of credit card debt ($75,000 overall) from irresponsible borrowing and spending.  There is no one to blame, but myself.  I have learned a valuable lesson from my journey into and out of debt, so I want to make sure I share all of the valuable pieces that I can.

Paying off my debt and saving at the same time changed my money mentality.  When I was in debt, I was making spending number one and saving number two.  After I paid off my debt, I switched and make saving number one and spending number two.  This the mentality that I want to have, so I am glad that I used my strategy.

There are some that think that it is unwise to save while paying off debt.  They tend to say that it is not good financially because you are getting charged interest.  They talk about the basic sense of mathematics.  While I love mathematics, debt isn’t truly about mathematics.  Yes, you get into debt because you spend more than you make, but most people are dealing with emotions.  Emotions push us to make bad money decisions and that is why debt is so rampant.  If paying off debt was just about mathematics, then no one would use the Debt Snowball.  Alright, enough about math, lets talk about the method I used when paying down my debt.

I created a dedicated page to show you how my debt/saving allocation method works. You can read more about it and see if it might work for you.

My Payoff and Saving Allocation

Any of you that invest know about investment allocations.  Your allocations can be deemed as aggressive, moderate, and conservative, plus a few more in between.  I used the same type of strategy with my debt payoff.  Instead of just allocating all of my extra money to my debt, I decided to allocate some to my savings account.

My first step was to find out how much I could allocate toward my debt payment.  This number is going to different for each person, but this is necessary.  Once you know how much you can afford to pay toward your debt each month, then you can come up with your debt/saving allocation.

I started out with a 95/5 allocation.  What this means is that I allocated 95% of my payoff money toward my debt.  The 5% was then put into my savings account.  For a simple example, if you have a payoff allocation of $100, then $95 will go toward your debt payment and then $5 will go toward your savings account.

Related Read: How to automate your savings with Digit

This allocation was also placed onto any extra money that I got each month, whether it be from side income or work bonuses.  It is a simple strategy, but it is quite effective.

When to Change Your Allocation

Whether you create an aggressive or moderate allocation toward your debt payoff, you will have to change it after some time.  I changed mine after I hit some milestones that I set for myself in the beginning.  I went from a 95/5 allocation to a 80/20 allocation at some point.  This means that I was still pushing 80% of my payoff money toward my debt and 20% toward my savings account.

As time moved toward the date that I would payoff my last credit card, I changed my allocation to push more money into my savings account than towards my debt.  My last allocation came in at around 60% into my savings account and 40% toward debt.  You have to find a point when you will change your allocation.  You can create certain milestones or goals that you have to hit before you change the allocation or you can do it whenever you feel.  It is up to you.

What is the Point?

I am sure there are some of you asking what is the point of doing this?  Why should you save money when you are in debt?  Well, as someone who was in a lot of debt, I can tell you that saving money is all about creating a new mindset.

Even saving a small amount of money, you are doing something that you haven’t before.  You are actually saving money.  You are not spending that extra money and putting yourself into more debt.  We have lost our saving mentality that used to be the mainstream.  We need to get that back and the only way to do it is to save. Until you create this new mindset, you will be stuck in an endless cycle of paying off debt. That’s now a way I want to live and I hope none of you want that either.

Another reason why this is a successful path is because you are building up a cash reserve.  Usually when people pay off debt, they are pushing everything they have at their debt.  They get to the last payment and then realize that they have no extra cash left.  They have nothing available for other purchases or emergencies.  With this strategy, you are building up your savings account while you pay off debt.  When you make your last payment, you are making a payment to yourself.  If you put money into savings during the whole debt payoff, then you will be ready to face the world debt free and with a good start for saving.

Related Read: How to build an emergency fund

I am trying to change the mentality of money here, not just worry about math.  I understand math and I know how it works, but money is not just about math.  We use money based on emotion, so we have to change how we feel toward money.  I am happy that I used my method because I now feel bad when I don’t put money into my savings account or investment accounts.  I feel even worse when I spend.  This new mentality has me on my way toward financial freedom.

What do you think about my debt payoff and saving rule?  I would love to hear your thoughts.

How to save money while paying off debt

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  1. Glen @ Monster Piggy Bank says:

    I like the idea behind your rule as saving is very much a mental thing, although I don’t practice it. I realise that the biggest bang for my buck is paying off my mortgage and investing my money in various different places. If the interest rates rise a bit more then I will start saving money, but until then there are too many different investment options to choose from that will pay better.

    Note: I still have my emergency fund, but I don’t consider this savings. I am also able to freely take money out of the extra repayments in my mortgage offset account, this means I am easily able to get money in a hurry if i need to.

    1. Thank you Glen, I appreciate it. I did this rule to both fund my emergency fund as well as another savings account after I got to a certain point in my EF.

  2. Love it! I think it’s important to get in the habit (and mindset) of saving money. I love that you feel bad if you aren’t saving, and I am trying to decide the best long-term strategy for saving for me as well. I would like to put some money into an account for absolute emergencies (like job loss of some catastrophic thing happening to the house), and some in another account for “expected” expenses like cars and whatnot. Want to work out a solid strategy but still trying to decide what will work best.

    1. Glad to hear that you like it DC. It is weird that I feel bad when I am not saving, but I think that is really a good thing.

  3. That sounds like it worked great for you! Congrats. I’m glad that you were able to do both!

    1. It definitely worked for me, so I figured I would share it.

  4. If there is any good thing to having a debt in collections, it is that it is interest free. So, my personal plan is to fund my seasonal unemployment first and then throw extra money at that debt.

    1. I guess you can say that is a good thing. It is like an interest free loan.

  5. I think this is an awesome approach! I haven’t seen anyone approach this question from an asset allocation standpoint, but I think it makes a lot of sense. I’ve said before that I agree with the saving while paying off debt approach, for all the behavioral reasons you mentioned above. Plus if you have an unexpected expense during your debt repayment, you have cash on hand to deal with it rather than resorting back to more debt. Like you say, a big part of successful money management is making good habits, which is why I wholeheartedly agree with your approach.

    1. Thanks for the kind words Matt. I like to think of some things a little differently than others. The easiest way was to use investment allocation.

  6. I love it! The amount you save should be based on your long term plan. So, if you’re really behind on long term goals, too, you may place a little less toward debt and more toward savings. I know that sounds backward to some people but the power of compounding interest is a powerful ally.

    1. You are correct Joe. My long term plan was to save, but I also had that Debt that needed to be eliminated. This is why I went with this approach. Yes, I added a few more months onto my debt payoff, but it was well worth it.

  7. Your Daily Finance says:

    I really enjoyed this post! Too often you see people pay off debt but then have nothing saved. Whats worse is that they have not developed the habit of saving to when the debt is paid off they end up spending the extra money on things they didn’t or don’t need. I like the plan of going from 95/5 to 80/20 and being more aggressive with savings the closer you get to paying the debt off. It forces you to shift to a new direction.

    1. Glad to hear that you enjoyed it. The best part is that you can choose whatever allocation you wish depending on your goals.

  8. Girl Meets Debt says:

    Great post Grayson! I also believe in saving some while aggressively paying down debt. Right now I’m averaging about $1300 a month towards debt and $100 a month towards retirement savings. I can’t wait until this debt is paid off so I can say I’m putting $1300 a month towards retirement! 🙂

    1. It sounds like you are on the right track GMD. That is awesome that you are throwing that much at your debt. It will be eliminated soon enough!

  9. Jake @ Common Cents Wealth says:

    I’m all for any method that helps people pay off debt and save money. I think your method is great, but my wife and I did it a little bit different. We kept a fairly large emergency fund ($10k) which we built up first and then 100% of our extra money went towards debt after that. We felt pretty comfortable with our emergency fund, so we didn’t feel like we needed to add to it. I can see if someone had only $1k or less, that the percentage plan you mentioned above would work really well.

    1. That is quite the emergency fund. I didn’t have such a fund, but if I did, then I would definitely go with 100% on the debt. Everything depends on the situation.

  10. Greg@Thriftgenuity says:

    I think it depends on where the savings is going. For example, I have my wife’s med school debt to pay off, but I want to take advantage of low mortgage rates and pickup another rental property, so we have put aside money for that. If I can’t identify any other investment opportunity that justifies not putting it all to debt repayment, then I will likely stick with straight debt repayment.

    1. You have a good point Greg, but when you are in a lot of debt and it is stressing you out, you need to find a way to relieve that stress along with fight the debt. A lot of people feel better with money in their savings account and having it liquid. I was very happy with this approach. While it might not have been about the math, it worked perfectly as I had planned it.

  11. I love it! It’s a mistake I see so often. I absolutely understand the desire to throw every penny you have at your debt, but if you have no cash reserve – you’re a crisis just waiting to happen. Things always break, stuff always happens and if you have no cash reserve – what can you do besides pull out your credit card? I think you had a very smart approach of aggressively eliminating debt and over time becoming more aggressive with your savings. Building a savings mindset is so important.

    1. I am glad you like it Shannon. I understand the desire as well, but I don’t think it is the right way. What is the point if you have an issue and you have to get yourself back into debt. This is the biggest argument for an EF.

  12. I’m fairly self-motivated, so I focus more on the math side myself. However, certain things really are more important than the math, and if you feel your motivation waning, then you really need to do everything you can to keep yourself going. It sounds like you have a great plan that obviously works if you’ve paid $50k off. Do an update in a few months and let us know where you’re at!

    1. For people in debt, it is not always about the math. They usually have to create a new mentality or mindset about their money and my method helps that. I am already done with my debt repayment, so I am good to go. That was all of the credit card debt that I owed.

  13. I learned that saving money is a lot easier for me if I don’t pay attention to it- IE- transferring money automatically. I make sure its an amount that I’m comfortable with.

    1. All of my savings is automated now and it was when I was going through this process. If I had a manual deposit, I would just split it up for savings and debt repayment.

  14. I think many people don’t realize that saving is a vital component to paying off debt. If there is no savings built up to handle life’s emergencies, then most people will use credit to fix those problems. They have just prolonged their debt repayment schedule because they did not have the cash to handle emergencies.

    1. You are spot on Brian. There are many out there that say that you should never save when you are in debt, but I disagree. I have been there and the stress of being on the edge with money was not worth it.

  15. I just had a fan Facebook me this exact question whether someone should save while paying down debt. I like the balanced approach because like you mention it builds a mindset.

    When someone who is in debt and has no savings can see that positive in an emergency savings it creates a relief of sorts in their life. I know we have a friend like this and every time her bank account has money in it she is much happier, when it’s gone she’s sad. Why would it be any different if she actually saved money and never used it unless there was an emergency. I would hope she would be happy there is money available to her that she saved.

    It may be small savings but anything is better than nothing at all. It’s also a head-start into the game of spending less than you earn and paying yourself first. When the debts are paid they are already in full-swing into saving.

    When one pays off a debt or many debts one can allocate more to savings as they go along. Once the debts are gone now the savings can grow even more using all that money which was used to pay down debt each month and/or dedicate it to something else that is important in the budget.

    I sent her the link to your previous post that you mentioned above and I’m sure she will see this new post. I hope your words will help guide her as well.
    Cheers mate.

    1. I really appreciate you sending her the link to the other post Mr. CBB. That is great. The whole part of this process is that you are changing your mentality from spending to saving. That is the goal. Even if you save only $5, you are still saving, which is probably something that many people haven’t done before.

  16. While it’s a great thing to be so motivated to pay off debt, I do think it’s important to save in the process. Like others have said, if something were to happen and you had no cash reserves, you would put yourself in further debt! That doesn’t serve for much motivation. Unfortunately I saw this happen to my parents, who were basically drowning in debt at some points. They barely had any savings because they were trying to keep up with bills, and if an emergency occurred, it set them back big time. It’s a horrible cycle. Saving is a great way to implement change and peace of mind.

    1. You are right E.M. Emergencies happen and if you have no way to pay off that emergency, then you are right back where you started. It only takes one to throw a big wrench in your debt payoff plan.

  17. I think the ratio should ensure the borrower does not go further into debt. Once a sufficient savings is built up (doesn’t need to be much), then 95/5 says you’re serious about getting out of debt. Once you chip away at the high interest debt, it makes sense to back it down to 80/20 or even further.

    1. Well, I started with the standard $1000 in an EF. I didn’t want that to be all that was there because that is really low. I also knew that I had 4 years ahead of me with debt payments, so I wanted to start small with the savings and then end big. It really worked for me, but the ratio’s can be moved around depending on the situation.

  18. I didn’t really save when I was actively paying off debt. I had my emergency fund and I started saving seriously once my debt was paid off. Now I set aside money for expenses and what not and save everything else.

    1. No everyone has to save when they are paying down debt. This is just a plan that I used and will gladly show to others. If you felt comfortable with your EF, then great. Glad to see that you are funneling money into your savings.

  19. Though I agree with your system and think it’s really smart, for me, paying off debt is a better way to increase my networth than saving (while in debt). I would rather get out of debt faster than have savings in my acct while in debt (outside of ER funds etc) and then redirect debt money into savings when debt free.

    1. It doesn’t work for everyone. This was more of an emotional win for me. I didn’t go with the debt snowball approach, so I needed another way to keep myself motivated and seeing my savings grow while my debt shrink was very powerful.

  20. You sure can do that. Part of your take home pay goes in paying down debt and some to savings. There can be another step to take and that is to regularly invest using dollar cost averaging. For investing, another key point is diversify.

    1. I was still investing into my 401k and that was good enough for me. Since I am relatively new to investing, I didn’t really look outside of my 401k until I was out of debt. I am kicking myself a little because of that, but I can’t look back now.

  21. Great post, Grayson. I think one of the most important things about saving while you’re in debt is simply that it creates the habit of saving, the mental mindset, like you talked about. I can see a real danger sign in not saving while paying off debt, that after the debt is gone, a person could go hog-wild and figure they now have lots of money to blow. If you’ve already established a savings habit, at least you won’t blow ALL of your extra money.

    1. This is the exact reason why I did this. I was spending most of my money before, but now I sit back and save it. My purchase decisions are longer and more thought out and I feel great when I transfer money into my savings account.

  22. Even when I have a car loan (which will be gone soon) and other debt, I still save. It’s important to me. I don’t want to start a debt free life with nothing.

    1. Good luck to you. I didn’t want to start the debt free life with nothing to show, so that is another reason why I saved. It was very empowering to see that money in my savings account.

  23. I have the same ratio perspective on paying off debt vs. saving. I thought I would make it more 50/50 by now, but I’m so over the debt that I’ve decided to just carry it at 70-80% for the rest of the process. I agree about learning to save, even if it’s a slight percentage, because it helps set up better habits in the long term. Great post – I agree it’s not as black and white as math.

    1. Thanks for your feedback Anna. There are so many different percentages that people can take, but it is all personal. I started extremely aggressive, then dialed it back.

  24. David @ PBC says:

    Hi Grayson,

    Yes, it is possible to settle your debts and save even just a small amount at the same time. The ratio depends on us. It is possible to schedule payments so you can have a little money left for savings every payday.

    1. Most of my debt payments were scheduled and my savings was automated based on my numbers for the month. There were times when I had to make changes, but that is understandable.

  25. thepotatohead says:

    I think its wise to save and pay down debt at the same time. Basically you aren’t putting all your eggs in one basket which is always a good way to minimize risk, even if it might not make the most sense mathematically to prolong the debt pay off. I’m actually trying to build up my emergency fund right now, so I’m not currently paying any extra towards my debt. So i’m probably at like a 40/60 or 50/50 debt to savings ratio. (I’d have to calculate that out though)

    1. Sometimes it is just not about the math. You need to keep yourself motivated and doing whatever you can to destroy all debt.

  26. Grayson, this is a great post. I have often talked to people who concentrate on paying down their debt to the exclusion of their savings only to see the error of their ways after a job loss or cutbacks at work.

    1. Thanks Jerry. You can never predict the future, so the best you can do is be prepared. This is why I did both.

  27. It’s so true, money management I’d say is mostly psychological, and much less math than people make it out to be. I know just putting an extra $50 towards my miscellaneous/emergency savings each month has made me feel far more in control of my money. If I hadn’t put that into a savings account, it likely wouldn’t have gone to my debt anyway — I would have found a way to foolishly spend it somehow. I now contribute more than that to my savings, while still working on mostly debt, but the biggest advantage has been actually having money there when I need it — when needing to get a deposit on an apartment, pay an insurance deductible, go to the doctor etc. No more putting everything on my CC because ‘I don’t have the cash right now’!

    1. It does feel good to have that money available, but also knowing that you are saving it. It is important to have that psychological victory.

  28. Financial Independence says:

    Here in Australia we can get a ‘offset account’ for our mortgage – essentially it is a savings account however instead of earning interest it reduces the interest on the associated mortgage. The money in savings stays fully liquid, but the loan balance for interest purposes reduces with savings. This has allowed me to throw all of my extra money at debt without worrying about liquidity or being able to access savings. If I didn’t have access to an offset account, I would definitely be doing the same as you and saving 5-10% of my money in a liquid account for emergencies.

  29. This is excellent. Maybe you’ve already addressed this, but I would like to to discussions regarding hanging onto money that has been saved. I’ve known people who will manage to save a few bucks, then have to use it shortly. Or at least they think they need to use it. For some folks, as soon as they get a little cushion, they find an excuse to spend it. I’ve found over the years that even for absolutely necessary expenses, such as car repairs, etc, many times it possible to absorb at least part of the expense from regular cash flow without using saved assets.

    1. Thanks for the comment Angela. I will work on creating some topics around this and hopefully you will be able to get some feedback on holding onto your money or what others do in order to hold onto their money.

  30. This is the best financial website I have found for practical information on paying off debt and saving simultaneously. Everywhere else seems to deal with paying off debt as if it were a simple matter of spend-less, pay-more off the debt, or earn-more and pay more off the debt…none seem to focus on saving as well.
    The fact is, with this method, I will have that emergency money available, that has previously been unavailable and left me to use credit cards instead.

    It seems every time I have started to get somewhere with my debt, an emergency has come up, that required me to use my card again to pay a lump sum. With this method, I will at least have a savings account that I can use if an emergency arises. Much more sensible.

    1. Thank you for your kind words Lorelei! I think this strategy is one of the best ones out there, but I’m partial!

  31. Jayson @ Monster Piggy Bank says:

    That rule worked on me as well. It is really fine to spend money after saving some amount of money. Less stress to deal with. Agree Grayson?

  32. Wow man I’m glad you chose a plan and stuck to it. I would say sticking to it is the hardest part. Most people don’t have the drive to do it because they get depressed or scared of what the outcome may be. Thanks for the tips too! all of them were very helpful.

  33. This is a fantastic approach. I have a few people I have been discussing this with who didn’t seem to understand the saving while paying down debt, so this article will help a lot.

  34. Great post! I started debt-free life with nothing and went into debt, and the cycle repeated. I was googling as how to break the cycle and came across your blog. Thank you for the valuable information. Now I understand the importance of saving.

  35. I’ve been doing this, too but not in a formal way.

    Due to a business related disaster and my income crashing, I’ve trashed my emergency fund and acquired some credit card debt. Instead of just focusing on demolishing that debt, I’ve also been putting a little bit away each month in order to rebuild my emergency fund.

    My income still sucks but at least I know I’m recreating that buffer that’s been such a lifesaver over the last year or so. I think I sleep better knowing it’s there.

    The debt will be dealt with in time, and it is a priority but I like knowing I have some cash in the bank, too.

  36. Jayson @ Monster Piggy Bank says:

    Grayson, that’s a good mindset and strategy. I would still save while in debt. Being in debt doesn’t mean that I cannot save some. I believe it is possible when we make it possible.

  37. I think it depends on your circumstances and you need to make the choice for yourself. I have an emergency fund that I built from lump sump gifts and bonuses. Now, I don’t save anymore additional money while I’m paying off debt, but I still have that cushion. I think it would be unwise to have no cushion because emergencies happen while you’re paying off debt.

    1. Of course it depends on the circumstance. Each person is different and this worked well for me!

  38. Katherine Felix says:

    It does help a great deal, when you have a profound understanding of the spending that you make. Rather than getting in to a debt, it is more important to save. Grayson, you have indeed put up some valid points. Handling debts can be complicated and it does affect us as a whole. Our expenses are based on emotions and unless we change the mentality, the situation is not likely to improve. Building up a cash reserve and making sure not to incur any unwanted expenses will indeed help us to save a great deal of money on the interest rates. Thanks for the information by the way.

  39. This is my goal as well. I have a plan on paying off my student loan in 5 years (about $34,000) but I am also putting 2% in my 403(b) (its what my company matches) plus saving up for my emergency fund and moving out. I am looking to save $10,000 by the end of 2016 while aggressively paying off my student loans. I am lucky that I am living in my parents and my father is helping me pay my student loans (contributing $150 a month while I pay $430). I am looking forward to paying off my debts while still having a healthy savings account.

  40. Chai Ying says:

    May I ask some question which I’m in the doubt of it? I just won the lottery and has been told that I will receive RM50,000 lump sum payment. I figure I could invest or save all the money but at the same time I was thinking to just pay off her debt exactly the same amount. What should I do?

    1. Well, congrats on winning. It depends on the interest rate of that debt. My initial thought would be to invest half and pay off debt with the other half. In that way, you’re earning money on one side, but also paying down on the other. This is when compound interest is in your favor.