Why it Doesn’t Make Sense to Accumulate Savings When You Have Debt

Having a savings account while also having debt is counterproductive, and costs you money to do so. I’m not talking about a mortgage you owe on a home, but rather credit card debt, student loans, and other types of debt.

Savings accounts typically pay you 1% interest, 2% if you’re lucky. Credit cards and other debt typically charge you much more than that.

It’s not hard to see why economically it doesn’t make sense. Take for example a situation where you have an extra $100. In a savings account you’ll likely earn less than $2 in interest income over the course of a year. If you have credit card debt at 20% interest then you’re paying about $22 in interest annually (after compounding). As a result, your $100 would be better applied to your credit card debt, since you would be saving $20 a year ($22 in interest charges avoided less the $2 in interest you would have earned).

The only argument I have heard from a financial professional as to why this might make sense to save while you have debt is because it creates ‘discipline’ for someone to put money into a savings account every month, and is a good habit to create. However, I’d argue that it takes just as much discipline, perhaps even more, to apply that money on your debt. You are still exhibiting discipline by not spending that money, and unlike with adding it to a savings account, you don’t get the benefit of seeing your savings accumulate.

It may not be gratifying to pay down debt since it may not seem as rewarding, but by paying those debts off you’ll be able to save much more later.