save money or pay down debt

Neither choice is the right one for every individual. Personal circumstances exert particular pressures that apply to only that case. But there are some considerations that apply universally and should be taken into account by everyone.

Look first at the simple mathematics of the debt-vs.-save question. It depends on what kinds of savings accounts you keep and what kinds of debt you have, but, generally speaking, you pay more in loan debts than you make in savings accounts. If that is true, you would accumulate more money — or lose less — by paying down debt first.

That may take some expertise and wisdom to figure out. Luck may also enter the picture. For example, if your savings include money in the stock market, no one can predict for sure whether it will turn out to represent a profit or loss. History has shown that smart investments in the stock market eventually pay off. But the market has always had its ups and downs, and the time you can afford for a payoff certainly is a factor in trying to evaluate whether to invest.

Let's look at savings accounts. This is where most people keep their so-called emergency funds, which are crucial to most people's financial survival. Who knows when a car will break down or a home repair will present itself? In the current financial world, a traditional savings account will earn less than 1 percent in interest. Balanced against a credit card debt, say, that represents a large net loss.

Situations vary, of course, but, if you had $1,000 in a savings account and $1,000 debt in a credit card account, when you got finished adding and subtracting the interest factor, you would be in arrears because you lose interest on the card faster than you earn it from the savings account. This would tell a reasonable person that paying off the debt first would be the smarter strategy.

If the debt is not consumer debt — if it is instead a mortgage or student loan — the interest rate may be lower and might even provide a tax deduction. But it remains unlikely that net worth would be improved by keeping the debt any longer than necessary.

However, there are also good reasons to save before paying down. The biggest and best is to provide an emergency fund. If you have designated your entire disposable income to paying down debt and provided no ready cash for yourself, when you are suddenly hit with an unexpected expense, your only option is to borrow even more. That only increases your interest payments and still gains you nothing on the positive side of the ledger.

A rule of thumb says that, if the interest rate on your debt is over 7 percent, you will lose money no matter how you invest; if it's 5 to 7 percent, you could break even with wise investments; and below 5 percent, you can afford to devote some money to saving or investing.

If your debt is very low interest, experts say, it makes sense to build a savings account of some sort to protect against emergency expenses. It doesn't even have to be an extravagant amount, but many authorities strongly recommend having $1,000 to $2,000 available as a defense against the unexpected. The goal should be an amount equal to three to six months of expenses. Obviously, that aim is reliant on a reliable income. If your income is risky, that goal may be out of reach. But the guiding principle remains valid: Don't leave yourself vulnerable to more borrowing if you can help it. And there is the additional factor of the peace of mind that comes from knowing you have money put aside for when you need it, either in the short run or the long run.

Under most circumstances, financial experts would say, find a way to do both: Split disposable income between paying down your debt and putting money away. And putting money away is not just for emergencies. It's never too early to begin in earnest saving for retirement.

Any of these choices, however, remain fluid, depending on each individual's situation and aspirations. Do you want to start a small business? Take a trip around the world? Start a family? Buy a house? These factors tip the scales in the direction of savings. Have you built up a large debt from overspending on your credit card? Do you have a large credit card debt? A car loan? Then concentrating on saving could be tempered. Each person's precise allocation of income must be customized to take into account current and future demands.

It's almost always accurate to say, though, that getting into a flow in which both savings and debt reduction can take place is ideal. Manage your debt to keep the interest as low as possible — such as via a debt-consolidation loan. Keep the saving or investment income as high as possible — such as in a 401(k) or IRA, especially if your employer is contributing a match.