Making that last payment on a debt you've owed for ages can feel like a giant weight lifted off your shoulders.

But should you use all your savings to pay off debt? Or is it smarter to keep some savings as a cushion in case of emergencies?

This article explores this dilemma and how to strategically weigh using your savings to repay debts vs keeping reserves available. You'll learn to compare interest costs vs lost liquidity and make an informed decision.

With some thoughtful calculations, balanced tactics, and careful planning, you can steadily improve both your debt profile and your savings.

Should I use savings to pay off debt faster?

Pros of using savings to repay debt

  • Saves money: Paying off high-interest debt avoids accumulating more interest charges
  • Increases cash flow: Eliminating a monthly debt payment frees up cash to use elsewhere, even to put into savings
  • Motivation: Achieving a zero balance gives you a psychological boost
  • Simplicity: Becoming debt-free simplifies finances with one less payment to worry about

Cons of using savings to repay debt

  • Lacks liquidity: Drawing down savings reduces your ability to handle emergencies
  • Loss of safety net: Depleting reserves exposes you to financial risk
  • Lower balance = lower interest: The returns on remaining savings are reduced
  • Missed opportunities: Money used to pay debt cannot be invested or used elsewhere

As you can see, it's a double-edged sword. Paying off debt provides definite immediate benefits but sacrifices future flexibility and opportunity.

Compare debt repayment vs saving your cash

High-interest credit card debt

Say you've got a $10,000 credit card balance charging a sky-high 19% interest rate, and you’ve also got $10,000 just sitting in a savings account, barely earning 1% a year.

In this situation, you’ve probably asked yourself, should I use my savings to pay off credit card debt?

Clearly, by using your savings to pay off the high-interest debt, you can dodge $1,900 in credit card interest over the next 12 months.

And you’d only have lost $100 in earned interest during that same time period.

Those numbers make the choice seem obvious. But is it that simple?

Here’s another question to consider.

Should I use savings to pay my mortgage faster?

But what if, instead of a credit card balance, it's a mortgage? Imagine having a $200,000 fixed-rate loan at 4%. You still have that same $10,000 in savings earning just 1%.

By putting the $10k toward the mortgage principal, you'd cut about $3,700 in total interest payments over the long run. By keeping it in savings, you’d still only earn $100 in one year.

Again, paying down even a relatively low-rate mortgage beats the savings account interest. But keep your timeline in perspective.

Eliminating a 30-year mortgage faster ties up your money for as many years as are left on that home loan.

What if interest rates change?

Now consider that rates can and do change.

In times when savings accounts earn around 4-5% interest, and you can secure a mortgage for about 3%, keeping the cash instead of paying debts may make sense. (And don’t forget any possible tax deduction implications.)

But today, with mortgage rates above 7%, paying off debt likely wins out.

When should you prioritize debt repayment over savings?

If you find yourself wondering if you should use savings to pay off debt, explore the examples below that illustrate when it makes more sense to focus on one over the other:

Situations when paying off debt should take priority

  • Your emergency fund already contains 3-6 months of living expenses
  • Your debt carries a double-digit interest rate that far exceeds your savings interest rate
  • You’ve received a large windfall like a tax refund that can wipe out debt without draining your savings
  • You're financially stable and unlikely to face an income disruption
  • You're young and have many prime earning years still ahead

Times when building savings should take priority

  • You have no emergency fund cushion
  • Your reliable income is at risk of suddenly decreasing due to job loss or disability
  • You need savings for an upcoming major purchase, like a down payment
  • Interest rates on your debt are low, like 3-4% fixed student loan debt
  • You want to maximize tax-advantaged retirement savings contributions

That said, don't rely on generalizations, assuming the answer is all one way or the other.

You can do a bit of both: use some savings to pay off your highest interest rate debt and keep some savings on hand for peace of mind.

The bottom line: crunch the numbers in every scenario to assess what the best tactic for your personal situation will be. Let the math be your guide.