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Paying debt off or building savings is a question facing many people. Each situation is different, but in general I believe that people should save a cushion before paying off debt. How do you do it exactly?

Build a One Month Cash Reserve

It can be hard to dig up money to pay bills, much less build a reserve, but it’s possible. Building up an emergency fund helps you keep eliminating debt and have a safety net.

While building a buffer, start calling credit card, banks, and companies that you’re in debt to. Try to see if you can lower or eliminate some fees and rates such as:

• Interest Rates
• Annual Fees
• Over the limit fee

If you can lower or eliminate some fees, even if it’s temporary, put the saved money into your emergency fund. A high yield savings account allows you to grow you money quicker than a typical savings account.

Have a garage sell either outside or sell through the internet. Unclutter your place and get some cash in your pockets to jumpstart your savings.

Consider Attacking Debt Starting with the Smallest Balance to Build Momentum

The purely financial choice would be to go and start with the highest interest.

• There different methods to working debt, some people use a snowball approach, and other break it down to snowflakes. Use what method works for you. The best system is on that you can stick with.
• Even when you’re paying your debt, have a portion of your paycheck transferred to a high interest savings account. Take 5-10% of what you pay for debt and automate deposits to build your emergency savings.
• Just keep working at paying your debt month to month and once in awhile put a big amount down to knock the debt down.
• Join No Credit Needed Network and keep track of your progress.
• Find a group of family and friends that support you and your goals.

A Reader’s Experience with Eliminating Debt and Having Savings

Shela was kind enough to share her personal take on the matter:

I actually did everything backwards. I had about 9 months of savings in my emergency account, then I looked at my interest payments on debt and thought, gee, this is stupid. So I took over half of that money and immediately put it toward debt payment.

And here is the most important part: I made a PLAN to eliminate the remaining debt. I had not been making much progress until that point, even though I was making well above the minimum payments. So I set up an Excel spreadsheet to track my payments and balances, started using Quicken for my bank accounts, and gave myself a $100 weekly allowance for groceries, gas, and misc. items. I also set aside some of my “bonus money” (from overtime pay, expense checks, rebate checks, gifts) to cover irregular expenses like vet bills or insurance payments. Everything else goes into savings and debt repayment.

I transferred most of my remaining debt to a 0% for 12 months credit card and am making minimum payments while putting the extra debt repayments in my high-yield savings account to earn interest. Then I will pay off the card before the offer expires.

If I can stick to this plan (and I have done so for 9 months now with no problems), I should be completely debt free in another 16 months. If I have additional bonus money, it will be sooner than that!

By having some savings, you can avoid or at least reduce the stress of an unexpected emergency. Paying down your debt can also help you in the long run. Remember, a good credit history can help as a higher credit score leads to lower interest rates.

What’s your take on it? Should you build savings or pay debt first?