In times of uncertainty, choosing to save extra cash or pay off debt can be more complicated. Here’s what to consider.

As we recover and seek stability in an uncertain post-COVID-19 world, many Americans are taking a closer look at their financial health — particularly their emergency savings. A recent survey conducted by Regions Bank* found that a quarter of Americans would have difficulty covering one month’s worth of expenses with their current savings.

If you’ve just received a chunk of money — a bonus, tax refund, or stimulus check — you may be wondering whether you should use it to pay down debt or save the funds for a rainy day. During times of economic uncertainty, it’s important to carefully consider a few factors before deciding how to best use extra cash.

Should I pay off debt or save?

Prioritizing paying off high-interest debt with extra cash has long been standard advice from financial gurus. The reasoning behind this makes sense — you’ll ultimately save more by paying down high-interest debt, reducing the total interest you pay in the long-run. While this is still solid advice, during times of economic uncertainty, it’s a good idea to first consider how secure your finances are before applying extra cash to existing debt.

Is your ability to cover your expenses at risk?

If the answer is “yes” or even “maybe”, you should aim to save any cash you can in an emergency fund rather than aggressively pay down debt. Make the minimum payments on your balances on-time to minimize the effect on your credit score and keep the cash accessible. If the worst does happen and you wind up losing a source of income, the money you’ve stashed away can help cover expenses until you’re able to regain your footing. Without that buffer, you could potentially find yourself unable to pay some bills, which could ultimately cause you to fall deeper into debt.

Are you currently financially stable?

If you are fortunate enough to be in a financially secure position with emergency savings in place, then using extra cash to pay down high-interest debt is still a solid strategy. And even if you are in a less secure position, there may be opportunities to manage debt while saving what you can. For example, you might consider saving half of your tax refund or stimulus check and using the remainder to pay off some debt.

Other tactics for reducing high-interest debt

If your credit is in good shape, you may have other options for reducing high-interest debt. Look at the rates on your debts and see if you have any opportunities to reduce your interest. One option might be to transfer your credit card balance to a credit card with a lower interest rate. Or, you might consider using debt consolidation to help secure a lower interest rate and reduce your monthly payments. Before making a decision, use our balance transfer calculator or debt consolidation calculator to plug the numbers and determine which option is best for your unique situation.

Ultimately, everyone needs to have savings for an emergency. While reducing debt seems like a conservative strategy when you are unsure about your financial security, it can be safer to keep some of that cash on-hand. And in the best case, if you reach a secure spot without having to dip into those funds, you will still be able to use them to pay down debt.

For tips, calculators, worksheets, and educational resources designed to help you make smarter financial decisions, visit Regions Next Step.

*The Financially Fit Family omnibus survey questions were part of a national online survey that took place between April 1 – 5, 2020. It reached N=2,000 US adults, and the results are weighted and are representative of all US adults (aged 18+).