If you’ve ever read a personal finance book or done an online search for financial tips, you’ve probably discovered that one of the most popular pieces of advice is to pay off debt. 

Some personal finance resources even go so far as to say that this is always what you should do first — they won’t even offer any other advice unless you’re debt-free. And yes, anti-debt advice usually feels a little judgmental, like you should have been “smart enough” to avoid debt in the first place.

But that’s not the approach we take here at Guiding Wealth. We know that for most people, having debt is simply a normal part of life. And debt itself is neutral. It’s not good or bad — it’s just a tool. There are better and worse ways to use that tool, but the idea that any and all debt represents poor financial decision-making is outdated and unhelpful.

That being said, we know that most people don’t want to just keep their debt forever. But if it’s not a hard-and-fast rule that you have to become debt-free before you do anything else with your finances, how do you know when to pay off your debt? 

Let’s look at four things you should consider before you decide to prioritize paying off your debt.

Debt Payoff Consideration #1: How Much Money Do You Have Saved?

Before you start allocating all extra funds in your budget toward debt payments, take a look at your overall financial situation, especially in terms of stability. 

  • Do you have a safety net? 
  • Is your emergency fund enough to handle something unexpected, like a hospital bill or furnace replacement? 
  • Are you making regular contributions to your savings account?

If you don’t have enough savings to cover at least a couple months’ worth of expenses, you might want to use a portion of your discretionary income to build up a bigger cushion before you go all in on paying down your loans.

And don’t just think about your emergency fund. Consider other types of savings, too:

  • Retirement 
  • College fund (for yourself, your kids, or your grandkids)
  • Home down payment

Some of these may not be a priority for you, and that’s OK. What’s most important is to take a few minutes to analyze your savings and see if that number aligns with your financial priorities. If not, it might be better to focus on saving more before you start working on your debt.

Debt Payoff Consideration #2: Are You Paying or Earning More Interest?

Most loans and lines of credit accrue interest. The longer it takes you to pay off those balances, the more interest you’ll pay overall. And that’s one of the main reasons many people want to pay off their debt as fast as possible.

But interest can also work in your favor. The money in your bank accounts (and investment products like Certificates of Deposit) earns interest. And the higher the balance in your savings account is, the more interest you’ll earn.

When you’re deciding how much money to put toward savings vs. paying off debt, look at the interest you’re paying vs. earning. In most cases, your debt will probably have a higher interest rate, but not always. 

Sometimes, big purchases like cars and home appliances come with very low promotional interest rates. If you have a 0% or very low APR on a loan, the interest you’re earning on your savings account might be higher. In that case, it might make more sense to keep making the minimum monthly payment on your loan instead of paying it off early.

Debt Payoff Consideration #3: What Type of Debt Do You Have?

You may have heard of “good” and “bad” debt. Here at Guiding Wealth, we don’t really consider any debt to be necessarily bad, but we also understand the idea behind this dichotomy. Generally, debt that has a low fixed interest rate (e.g., a mortgage or car loan) has fewer disadvantages than debt that as a high adjustable interest rate (e.g., a credit card balance).

So, what kind of debt do you have? It might be a mix — maybe you have a car loan, a student loan, and a balance on a credit card. Once you know exactly what types of debt you have, including the balance and interest rate on each loan, you can decide how you want to prioritize your payments.

There are two basic approaches to paying off debt:

  • Snowball method: This approach starts small and picks up momentum as you go. Choose the loan that has the smallest balance — that’s the one you’ll focus on. After you set aside the money for minimum payments on all your other debts, use any remaining debt-repayment funds you have to put toward this small loan and pay it off faster. Once you’ve paid off the balance, take all the money you were putting toward paying it off and use it to make payments on the next-smallest loan. Repeat this process until all of your loans are paid off.


  • Avalanche method: This method focuses on eliminating high-interest loans first. The mechanics are basically the same as the snowball method: make minimum payments on all your loans and then choose one to pay off faster. With this method, you choose the loan with the highest interest rate to pay off first. After that one is gone, you work on the debt with the second-highest interest rate, and so forth.

Both of these methods work well, so choose the one that you prefer.

Debt Payoff Consideration #4: What Are Your Financial Goals?

Finally, think about your other financial goals (besides becoming debt-free). What else do you want your money to do for you? Maybe you want to expand your family or buy a new car. Maybe you want to save more for retirement or prepare your finances to care for your aging parents

There’s no wrong answer! The point is to identify your goals and values. Once you know them, you can decide where your debt repayment falls in the priority order. Becoming debt-free can be your first priority, but it doesn’t have to be.

Debt Is Just One Part of Your Financial Situation

When you’re constantly hearing messages about how bad or “stupid” debt is, it’s easy to feel ashamed about your loans or credit card balances. And you might think that you have to become completely debt-free before you can start pursuing other financial goals, like buying a home or saving for retirement.

But the truth is that debt isn’t necessarily good or bad. It just is — and it’s something that most of us will deal with throughout our lives. And having debt doesn’t mean you have to put all your other goals on hold.

Can you prioritize paying off debt before other aspects of your finances? Yes. But that’s not always the best decision. Before you decide to put every spare cent into debt payments, consider your savings and the difference between the interest you’re paying and earning. And most importantly, think about your priorities and financial goals.

If you’re not sure what your goals are or how to pursue them, we can help! Our team of experienced financial planners isn’t going to give you one-size-fits-all advice or judge you for carrying a credit card balance. Instead, we’ll help you identify your financial values and make sure your goals match. Then, we’ll help you create a plan to reach them.

Are you ready to get started? Schedule a consultation!