How paying down debt is actually saving money

Most people consider saving money as having enough to maintain an emergency fund or to start an investment portfolio. But one of the most powerful ways to save money is often overlooked: paying down debt. While debt is a financial burden, repaying it can be a strategic form of saving.

Benefits of paying down debt

The first way that paying off debt saves you money is through interest savings. Paying off debt early reduces the amount of accumulated interest paid, which can be a substantial savings over time. Every interest payment you don't make is money you get to keep. Instead of only making the minimum payment each month, pay off your debts faster. You’ll save hundreds, if not thousands of dollars in the long run.

Having a lower debt-to-income ratio and paying down debt can also improve your credit score, which has wide-reaching implications for your finances. Credit scores are based on several factors to show if you are responsibly managing your credit. That includes your track record in making on-time payments, the amount of debt you have, and if you have different kinds of debt that you are managing well, like an auto loan, credit card and mortgage. Maintaining a low credit card balance compared to its limit also improves your credit score. A good credit score will lower car insurance premiums, mortgage rates and even interest rates on other future loans. This is another way that paying off debt is actually saving money in disguise.

With debt under control, people experience the financial freedom that comes with having more disposable income. Once your debt is paid off, you have more money for daily life and activities that bring you joy. That might include taking a much-needed vacation, buying a gift for a loved one, or reveling in the good feeling that comes with knowing you have more than enough to pay for groceries at the end of the week. Plus, money that was going toward payments can now be saved or invested, which can lead to better financial outcomes in the future. Perhaps most important of all, paying down debt can reduce the stress surrounding financial uncertainty and improve your well-being.

We’re here to provide support; contact us

If your debt feels insurmountable, it can be overwhelming to know where to start, which can lead to inaction. Think of tackling debt as taking baby steps in the right direction. Even small steps, like packing a lunch instead of dining out, or reviewing your monthly budget can give you a more positive outlook and help you feel more in control.

We offer free financial counseling to help people create a personalized roadmap to success. If you are facing debt, you are not alone. With small, consistent steps, you can gain the financial freedom that comes from paying down debt. Call 888.577.2227 today to set up a free, confidential appointment with one of our trusted, nonjudgmental financial counselors. 

Becky Pakarinen is the senior director of Financial and Employment Services for Lutheran Social Service of Minnesota, which offers a certified nonprofit financial counseling service that has been providing free, nonjudgmental support and guidance for more than 35 years.