How to Save Money, Invest, and Pay Off Debt at the Same Time

Building a financial strategy that works can be tricky. Should you clear your debt before investing? But what about your savings account? Things can get overwhelming fast. That’s why we tapped Bola Sokunbi, a certified financial education instructor and the founder of Clever Girl Finance, for some advice on how to create a plan that works. The good news: She says you can do it all — and at the same time.

FEATURED EXPERT: BOLA SOKUNBI

Bola Sokunbi - Author, certified financial education instructor, and founder and CEO of Clever Girl Finance

Is it better to pay off high-interest credit card debt or save first?

It is actually possible to do both but with a specific strategy in place. While high-interest debt can be very expensive, it makes sense to have a cash buffer set aside first. This way, when life happens (and it always does), you are less likely to leverage more debt since you have cash set aside. So focus on building a basic emergency fund of $1,000 to $1,500 while you make minimum payments on your debt. Once that fund is in place, you can ramp up making extra payments to your debt in order to more aggressively pay it down.

How can I pay down debt, invest, and save all at the same time?

Start by building an emergency fund and save at least $1,000 to $1,500 as a basic cash buffer. This amount can cover unexpected costs like higher-than-usual utility bills, emergency travel, or car repairs. Once you've achieved this, gradually increase your savings to cover three to six months of essential expenses, such as rent or mortgage payments, groceries, medications, transportation, and core utilities. This safety net can be crucial in case of job loss or emergencies.

To begin investing, maximize your retirement contributions. If your employer offers a retirement savings plan with a matching contribution, take full advantage (it's essentially free money). Contribute enough to receive the full match. Even if your employer doesn't provide a match, consider allocating 5% to 10% of your income toward retirement savings. If you don't have access to an employer-sponsored plan, you can open an individual retirement account, aka an IRA, to start saving for your future.

Finally, develop a budget that prioritizes aggressively paying off your debts, if possible. Monitor your income and expenses closely, aiming to keep your spending as feasibly low as you can. It's essential to concentrate on debt reduction because the accumulated costs associated with high-interest debt can be very expensive over time.

My debt is paid off, and I have an emergency fund. Now what?

The next step would be to invest for your future self and build up your nest egg. This would mean maxing out any employer-sponsored 401(k), 403(b), or 457(b) plans and setting up an IRA and maxing out your contributions there as well. You can also open up a brokerage account, where you can invest outside of your retirement accounts. Remember to do your research and focus on building a well-diversified portfolio to minimize risk.

When should I consider a balance transfer?

First, only do it if you know for sure that you’ll pay off the entire balance transfer amount within the introductory offer period. Balance transfer offers typically come with lower initial interest rates which only last for a period of time. Based on this, you need to make sure you can afford to pay off your balance in full before this period expires. So ask yourself: How much do you need to pay each month to finish off the balance in full before the introductory period expiration date? If you run your calculations and find that you can't pay your balance off in full before the introduction period offer ends, it might actually cost you more money in the long term if you make that balance transfer.

Also, you need to make sure that you’re aware of all the fees, and that they make sense for you. Many balance transfer agreements require you to pay a percentage of your balance as a processing fee (usually between 2% to 5%). So compare your current interest rate to what the balance transfer offer is, in addition to these associated fees — does it still make financial sense? Will you be saving money, or will you be paying more in the long run? 

This interview has been edited and condensed for clarity.