Many people ask me whether they should continue saving or investing while they are getting out of debt. That’s a great question, because it is very important to save and invest for your future. So, is it right to keep building your savings when you’re in debt and if so how much should go to each?

I do recommend having some savings when you are getting out of debt. It is important to have some sort of “emergency” account, because things happen. Most financial experts recommend having $1000-1500 in an “emergency” savings account. I like to recommend $2000 just to be safe, but no less than $1000. One to two thousand dollars is enough to cover most emergencies for most people, but if you have higher deductibles than that, you may consider saving a little more. A good rule-of-thumb I use is have enough to cover your deductibles, but don’t continue saving more than that.

Most of the time, our debt has a higher interest rate than what we are earning from savings. If you are paying twenty percent interest on your credit card debt, and earning half-a-percent on your savings, then it is financially retarded to keep putting money into savings. What about investments? If you have a 401k, and your company is matching your contribution then continue to fund it. Just make sure you are not putting all that money at risk, have at least half in cash (until you pay off all consumer debt at least).

If your company matches your 401k contributions, that you are doubling your investment every year, even if its just in a money market account. That’s a great no-risk investment. Most companies have a maximum match that they will do too, so if you have maxed that out for the year, then stop funding it. If your company does not match your contribution, then don’t fund it all. Just put that money toward paying off your debt.

This does not apply if your house is your only remaining debt though. If you are debt-free except for your mortgage, then yes begin saving and investing again. Once all your other debt is paid off, build your savings to an amount equivalent to six to twelve months of living expenses. But, when you are getting out of debt it is better to use the additional money you would be saving and investing on getting rid of the debt.