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Thursday, November 30, 2023

Balancing your goals | Vanguard

What should happen first—Paying off debt or saving for the future? Is it possible to do both?

As you might expect, there’s no black-and-white answer to this question, but I advise my clients to follow these steps:

  1. First and foremost, take advantage of whatever 401(k) match or benefits your company provides. Not doing so is leaving free money on the table!
  2. After that, tackle any personal debt you may have (such as credit card debt). Personal debt typically comes with interest rate payments, so you’ll want to chip away at those amounts as fast as you can.
  3. A third (and important) step is to create an emergency fund, which consists of money set aside for any unexpected costs that might come up in everyday life. Keeping these funds liquid and ready to use will help you avoid putting these expenses on your credit card.
  4. After you create your emergency fund, turn your focus back to any other outstanding debts you have, such as car payments or student loans.
  5. Once you’ve eliminated most or all of your personal debt, you’ll want to focus on increasing your savings beyond your emergency fund. You can increase your 401(k) contributions or, if you’re eligible, contribute to an IRA. Another option is to open a brokerage account, which has more flexibility when it comes to withdrawing money.
  6. Look at your mortgage payments last. Mortgage interest rates are typically low enough that investing your money in the market can have a higher payoff.

Are there times when I should take on debt and leave my savings alone?

There aren’t many times when taking on debt makes more sense than using your savings, but one I can think of is buying a new house. I see many of my clients buying a new house before selling their original house, and they ask me if they should sell their investments to pay for the new house. My answer is no; utilize the low rates that come with a mortgage and don’t sell your investments to cover the down payment unless you need to. You can later use the cash proceeds from the sale of your original house to start paying off the mortgage and increasing your cash account.

If my debt has low or no interest, is it better to invest?

Some clients have asked me if debt with low or no interest should be addressed later in favor of investing, and the answer really depends on what kind of debt it is. You may have a credit card that has low interest now, but that interest could quickly increase if you don’t pay off the debt. In this situation, it’s best to pay off the credit card debt as soon as you can. But if your car or mortgage payments have low interest, it might make more sense to invest your money and pay off those expenses over a longer period.

How much of my investments should be kept liquid?

Back to the emergency fund: Many of my clients wonder how much of their investments should be kept liquid and how they can calculate this amount. When evaluating how much money you might need in an emergency, it’s important to analyze what “could” happen. We define spending shocks as events you’ll have to pay for, no matter what—such as home or car repairs. An income shock—such as getting laid off—can pack a heavier punch. I ask my clients to evaluate the risks of each type of shock:

  • Spending shocks. Ask yourself the following: How old is my car? Do I rent or own my home? How do I get to and from where I need to go? Do I often have to pay for home repairs?
  • Income shocks. Ask yourself the following: How easy is it to switch jobs in my industry? Are my skills transferrable? What would getting laid off look like? Does my spouse have a steady income?

Thinking about these situations can be stressful but will allow you to evaluate how much money you’d need in an emergency.

Any tips on how to save more, with or without debt?

If you’re lucky enough to be without any debt, save as much as you can as early as you can; it will always pay off in the long run. Review your budget frequently—especially as you enter retirement, since your budget will change completely—and assess where you can cut costs and how you can readjust your habits. Do this as frequently as you can and you’ll always know where your money is going.

Work with Vanguard Digital Advisor® and utilize our debt calculator for all of your balancing needs.


All investing is subject to risk, including the possible loss of the money you invest.

Vanguard Digital Advisor’s services are provided by Vanguard Advisers, Inc. (“VAI”), a federally registered investment advisor. VAI is a subsidiary of The Vanguard Group, Inc. (“VGI”), and an affiliate of Vanguard Marketing Corporation. Neither VGI, VAI, nor its affiliates guarantee profits or protection from losses. For more information, including acceptable reasonable restrictions to place on your investment strategy, please review Form CRS and the Vanguard Digital Advisor Brochure.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and Certified Financial Planner™ in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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