To continue enjoying all the features of Navy Federal Online, please use a compatible browser. You can confirm your browser capability here.

Bottom Line Up Front 

  • Before you accelerate your debt payoff, make sure you have emergency savings.
  • If your employer will match your retirement contributions, sign up, or you could be leaving free money on the table.
  • There are 2 simple methods you can use to pay off debt faster.

You’ve budgeted, cut expenses and now—success! You have some extra cash each month. For many people, the challenge is deciding what to do with it—pay down debt or put it in a savings account. The answer depends on your circumstances.

Do You Have an Emergency Fund?

It’s always a good idea to have a financial cushion to be ready for the unexpected. So, if you lose your job unexpectedly or your car breaks down, you’re prepared. Consider starting with a small goal, like working toward putting away $500, and build from there.

Have You Started a Retirement Fund?

Even if retirement is a long way off for you, it’s important to open a retirement account. It’s okay if you can only contribute small amounts in the beginning, because the sooner you begin saving, the better off you’ll be when you’re ready to retire.

One great way to build your fund is by participating in an employer-sponsored plan, like a 401(k). If your employer offers one that comes with a match, you definitely should take advantage of it. Why? The match is free money. For example, suppose you decide you can contribute $20 a month. If your employer matches that amount, you’re actually having $40 a month being deposited in your account for your $20 investment.

There’s one other thing to keep in mind. Your retirement account will probably earn dividends over a long period of time. And, those dividends can help your fund grow larger faster. Plus, since these funds are tax-advantaged, you’ll be saving on taxes.

How Much Debt Do You Have?

Once you’ve established an emergency fund and started on saving for retirement, the next step is to look at how much debt you have (e.g., student loans, credit cards, auto loans). Write down what you owe on each and the interest rate you’re paying.

There are 2 very simple ways to pay off debt faster. The first method is to work toward paying off the account with the smallest balance, and the second is to work on the debt with the highest interest. You’ll still make all your minimum payments, but you’ll add extra money to the payment for the account you’ve decided to concentrate on. Here’s how it works.

Let’s say you have $100 each month to put toward paying down your debt. Using the example above, if you’ve decided to work on paying off the account with the highest interest, you’d make your regular payments for credit card 1 and your auto loan, but for credit card 2, you’d add $100 to your regular payment. Once that’s paid off, you add credit card 2’s regular payment amount plus the $100 to your auto loan’s payment, and so on.

If you’ve decided you want to work on the account with the smallest balance, you’d add $100 extra to the payment for credit card 1. Then, when that’s paid off, add credit card 1’s regular payment amount plus $100 to credit card 2’s payment.

Not only does it feel great to accomplish your goal, but by eliminating one of your monthly obligations, you’ll have more room in your budget for other things.

Quick Tip: To save on interest while you’re paying off debt, see if you qualify to transfer existing high-interest balances to a low- or no-interest credit card. That offers you the best of both worlds: you can plug away at your debt while saving on interest. Just be sure to note when the interest rate goes up if it’s a special offer. Check out Navy Federal’s current credit card offers.

Let’s Recap

To decide on whether to use extra money for savings or to pay off debt, concentrate first on having some savings and then move on to chipping away at your debt.

  1. Make sure you have an emergency fund
  2. Participate in a retirement plan
  3. Choose and follow a debt repayment strategy (high interest or low balance)

More Resources

If you’d like to know more about debt repayment strategies, check out our video, MakingCents: Strategies to Get Out of Debt. Navy Federal also provides personalized financial guidance for our members, based on your specific needs and goals. We’re here to help you set goals, anticipate challenges and get control of your finances.


This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.