True or False: “It’s more rewarding to pay off debt than to save money”

For this week’s Reality Cheque, we’re looking at paying off debt versus padding your savings—and which one a financial therapist says is harder to tackle.

You finally have a little extra money at the end of the month. The responsible part of you says pay down your high-interest credit card. The ambitious part says start investing. And the cautious voice in the back of your head really wants you to tuck the cash away. So, which voice to listen to? The answer isn’t one-size-fits-all, and it’s about more than math.

Here’s what financial experts say: If your debt has an interest rate higher than 6%, work to pay it off. If the rate is lower than 6% (like many mortgages, and student and car loans), you may be better off making the minimum payments and investing the difference for a higher long-term return. You also should have three to six months’ worth of living expenses saved in a high-interest savings account for emergencies. But doing it all at once is tricky – money goals work best when treated like a boy band: one sings lead while the others harmonize.

Keep reading for help on deciding what to do first (or how to split your efforts).

Is it easier psychologically to pay off debt or save? 

“We’re conditioned in our culture that paying down debt first is something that you’re supposed to do. Then once you pay down your debt, you’re supposed to start saving your money,” says Michelle Johnston, a registered psychologist in Calgary. “We put it into two mental accounts, when it doesn’t always make sense depending on a person’s situation.” People have very individual approaches to debt and saving, she says. For some, it may feel easier to put money aside rather than deal with debt.

Debt carries more than interest—it carries emotion

There’s a lot of emotional weight attached to debt, says Johnston. As a financial therapist, she helps clients explore the relationship they have with money, looking at how their thoughts, feelings and behaviours around money are all interconnected and influence one another. If you’ve accumulated a lot of consumer debt, for example, you might feel frustrated with yourself and unable to see a clear path through. Debt acquired through a job loss or a divorce can come with its own complicated emotions, like anger or helplessness. And when it comes to really high-interest debt, the more we avoid paying it off, the more problematic the emotions involved can get, she says.

With debt, the biggest underlying emotion that really impacts people is shame, says Johnston. “That shame can become normalized because we don’t have spaces to bring it up or address it comfortably. You can’t really talk to your accountant about how anxious you feel or how stressed out you are. And shame thrives in silence.” 

Where to start 

Johnston offers these tips for tackling the emotions associated with debt.

• Take a look at your money story (psychology-speak for the ways money was talked about in your family when you were young) and the beliefs you’ve brought into adulthood. For many people, for example, money was never talked about, causing confusion and fear. For others who were raised in a home where money was tight, there can be a lot of anxiety and shame.
• Use emotional regulation tools—everything from deep breathing to decatastrophizing—to help handle any distressing feelings that come up when you look (or even think about) your bank statement. “There are different ways we can comfort ourselves or take care of ourselves as we start to remove the shame and the discomfort,” says Johnston. (In her practice, she uses techniques from both Cognitive Behaviour Therapy and Acceptance and Commitment Therapy.) 

We can’t go back into the past and change the situation, she says. “But we can empower ourselves in the present moment to take action in a way that’s more aligned with our values.”