Estimate Time5 min

How to balance debt, saving, and investing

Key takeaways

  • No matter what other financial priorities you have, always be sure to make at least the minimum payments on all debt, on time.
  • Your next step should generally be to build up a cash buffer, so you have some wiggle room in your finances to help you meet unexpected expenses.
  • If possible, you should then try to capture the full amount of any employer match on retirement savings, so you don’t leave "free money" on the table.
  • Paying down any credit card debt and fully funding your emergency savings should generally be your next moves, before you move on to other investing or debt goals.

Student loans, credit cards, and mortgages—oh my. Like many people, you may have a variety of debt. And like many people, you may be working to pay off your balances while also trying to build up some savings for a rainy day (not to mention retirement).

Trying to juggle so many competing priorities can be stressful, particularly if you’re not sure how best to focus your attentions. So we put together this step-by-step guide to try to help you decide what to tackle first.

Although we may not be able to fund your 401(k) for you or kill your student loans, hopefully we can help take some of the confusion out of the process as you work toward your goals.

Step 1: Make all your minimum payments

This could almost be "Step 0," because it should go without saying: Always make at least the minimum payment on all debts, on time. Keeping your debts in good standing is crucial to protecting your credit score. Plus, missed payments can lead to late fees and compounding interest charges, which can cause debts to quickly spiral out of control (and in extreme cases even lead to bankruptcy).

The first card in this image reads: 'Your move! Make all your minimum payments.' The second card reads: 'Your move! Build up a cash buffer.'

Step 2: Build up a cash buffer

Once you're meeting your minimum obligations, it's time to build some reserves. We suggest you start by saving up an initial cash buffer of $1,000 or one month's rent, whichever is greater, to give you some breathing room in your day-to-day (fully funding your emergency savings will come later, after you've checked off a few other boxes).

That way, even if occasional bumps come up, you won't run the risk of missing bills because your checking account balance is too low.

Bonus points

If you know for sure that you’re going to face certain qualified medical expenses, you could consider saving enough to cover those expenses in a health savings account (HSA), even before funding other priorities (if you have high-deductible health insurance and qualify for an HSA, that is). That’s because the significant tax savings you can reap with an HSA are almost akin to receiving a discount on those expenses.*

At the same time, don’t stress over this step if the prospect of forecasting your medical expenses makes your head spin. Doing what you can and keeping at it is more important than doing everything perfectly.

Step 3: Capture the full employer match

Next, it's time to look around for any low-hanging financial fruit. That means trying to contribute enough to your 401(k) or other workplace retirement plan to capture the full amount of any matching dollars your employer provides.

Your employer's match is essentially "free money," so not taking advantage of it is a bit like leaving money on the table. (That said—look into whether your employer's contributions take time to vest, and think about whether you'll stay at your job long enough for them to fully vest before you start banking on that free money.)

The third 'game' card, shown in this image, reads: 'Your move! Capture the full employer match.' The fourth card reads 'Your move! Pay off credit card debt.'

Step 4: Pay off any credit card debt

If you've been carrying balances on any credit cards, now is the time to start chipping away at them by paying more than your monthly minimums. Eliminating this debt is important so that you don't get stuck on a high-interest treadmill.

What if you're carrying a balance on more than one card? In that case, focus first on paying off your highest-rate card, followed by the second highest, and so on. (And once those cards are paid off, make sure to start paying your balance in full, every month.)

Step 5: Fully fund your emergency savings

Next up: Your rainy-day fund, aka your emergency savings. For this step, you should aim to save at least 3 to 6 months' worth of essential expenses, and keep those savings in cash so you could access them easily if you ever needed to.

Although it might feel like a lot to keep in cash, remember that this money is your safety net, protecting you from having to fall back on credit cards if a job loss, medical emergency, or other life curveball were to come up.

The fifth card, shown in this image, reads: 'Your move! Fully fund your emergency savings.' The sixth card reads: 'Your move! Weigh investing vs. debt.'

Step 6: Weigh investing vs. paying down debt

The good news is, you now have many of your most pressing financial needs covered, so you can start moving down your priority list. That bad news is, this is where your decisions may start to get more complex.

If you still have debt—whether student loans, an auto loan, or a home equity or mortgage loan—try comparing the interest rate on your debt to our rule of 6%. That can help you decide whether your next priority should be paying more than the minimum on remaining debts, or investing additional (unmatched) dollars toward retirement. (If you do have student loans or a mortgage, also make sure you're taking advantage of any tax deductions you're eligible for on the interest you pay.)

Ultimately, you should aim to save 15% of your pretax income toward retirement each year (this includes any employer matching contributions). Try to hit that mark before you continue down your priority list.

The seventh and final card, shown in this image, reads: 'Your move! Turn to your other savings goals.' The final tile of the 'game board' is also shown and is labeled 'you did it!'

Step 7: Turn to your other savings goals

Once your debt, retirement savings, and financial safety net are in a strong position, it might be time to start turning your efforts (and extra cash) to your other goals, whether saving and investing for a child's college education, planning for the trip of a lifetime, paying off other remaining debts, or something else.

What goals you have, and which you choose to fund first, may be personal to you, so there aren't necessarily any hard and fast rules for how to best focus your efforts. (Learn more about identifying your savings goals.)

If you aren't already working with a financial professional, this might be a time to consider bringing in some help. A professional may be able to help you identify and prioritize your goals, plus come up with a saving and investing strategy that can put you on track to reach them.

It will still be up to you to do the hard work of funding your goals, but it never hurts to get some outside reassurance that you're on the right track.

Open an account with us

It's easy! Opening your new account takes just minutes.

More to explore

* Contribute to your HSA as long as Saver's Credit or Earned Income Tax Credit (EITC) would not be reduced.

The information provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website at You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses, online, or you can call the IRS to request a copy of each at 800-829-3676.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917