This may seem like a strange question coming from me. As a huge proponent of saving, my usual advice is to save early and save often. Mostly I think there isn’t any such thing as saving too much. However, if you have debt, and you are finding it difficult to pay it down while you save, you are saving too much.

It can be confusing. Everyone says you should be saving for retirement. And it’s true. The earlier you begin saving for retirement, the easier it will be to save enough to support yourself when you stop working for pay.

However, there are a couple of things that need to come ahead of maximizing your retirement savings, and one of them is reducing your debt. If you have outstanding debt, other than your mortgage, saving money may not be improving your financial situation. You may be simply running in place.

Debt reduction is a form of saving that is as good or better than others, and paying down your debt can offer you a better return than saving.

According to Wallet Hub, the average credit card interest rate in the second quarter of 2018 ranged between 14.2 to 22.4 percent. When you pay down your credit card debt, you are saving the interest expense. That translates to a guaranteed return on your money that is better than any investment opportunity.

If you have car payments or student loans, the interest rates may be lower. But the lower rate doesn’t make it less important to pay them off.

If you have debt, you may be able to earn more by paying it off than you can by saving and investing in the investment markets. But that isn’t the most important advantage of paying off your debt. The biggest advantage is in the flexibility and security you will gain.

Debt payments are a mandatory expense. You can’t choose to not make them. As a result, when you have debt you are closer to the financial edge. If you lose your job, or can’t work because you’ve become ill, your reserves will be chewed up faster if you have debt payments. Your emergency fund needs to be larger because your mandatory expenses are larger.

You will be better off if you reduce your savings, so you can pay off your debt faster. However, there are two exceptions.

1. Before you begin aggressively paying down your debt, make sure you have an emergency fund. You should be able to cover your mandatory expenses for three months. Make only minimum payments on your debt until your emergency fund is in place. Having the emergency fund will help you stay out of debt in the future.
2. If your employer offers to match your 401(k) contributions, and you can make extra payments on your non-mortgage debt while getting the match, then contribute enough to get that. It’s free money.

Beyond establishing an emergency fund and getting your 401(k) company match, focus  all your extra money on paying down your debt.  You’ll be able to save more once your debt is paid off.

If you are having trouble getting rid of your debt, then save less. Debt reduction is a form of savings, that offers a guaranteed return equal to the interest rate on your loan. Getting rid of it is an important step in building your financial security, and once it’s gone, you’ll have the flexibility to put even more in savings.

Photo by Justyn Warner on Unsplash