The importance of paying off debt can’t be understated. Not only does debt put pressure on overall financial circumstances; the financial worry is also scientifically linked to physiological and psychological distress. But are there times when you shouldn’t focus on it? I say yes.
I spent the majority of my 20s paying off debt. If there was a debt you could have, I likely carried it: student loan debt, credit card debt, medical debt, auto loans, retail debt… the list went on. Debt payoff became an unhealthy obsession of mine and I learned, through trial and error, that paying off debt wasn’t the only piece of a healthy financial puzzle. Sometimes, focusing only on paying off debt actually hurt my personal finances.
I made these mistakes so you don’t have to. Here are five scenarios where you shouldn’t pay off debt.
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No. 1: Your basic needs aren’t being met
The “four walls” are defined by food, housing, transportation and utility costs. These expenses are essential to daily living and without them, your life may be unstable. If you’re not able to pay for food, housing, transportation and utilities, you need to focus on laying a more solid foundation before you start paying off debt.
Paying off debt, saving money, investing or doing anything outside of covering your basic needs is a privilege. In order to move forward with financial goals, you must have money left over each month outside of your four walls. If you don’t have anything extra, that’s where you need to start focusing your attention.
National statistics back up the very real challenges of keeping up with the increasing cost of living. The cost of shelter rose by 5.2% from June 2023 to June 2024, according to the Consumer Price Index. Americans spent 16.8% of their income on transportation in 2022, and food prices have risen 28% since 2019, according to additional data from the Bureau of Labor Statistics.
Being in a situation where your basic needs aren’t being met is uncomfortable and scary. If you find yourself in financial trouble, reach out to local organizations, nonprofits and religious communities that offer financial assistance. You can search for organizations like this through your specific state and city websites.
No. 2: You have an unforeseen life emergency
There is a reason personal finance experts emphasize having an emergency fund before you start paying off debt, but even with an emergency fund, life is expensive and unpredictable. If you have an unexpected event that drains your emergency fund or is life-altering in a way your emergency fund can’t cover, it’s time to put a halt to your debt payoff journey.
What can that look like?
You lose your job
The biggest and most often-occurring emergency that could stop debt payoff is losing a main source of income. Mass layoffs, extended job searches and inflation have made this traumatic event an increasingly common wrench in financial goals, which include debt payoff.
This is without even considering the loss of benefits like health care coverage you could experience if you lose full time employment.
If you’re experiencing this or predict you will in the near future, stop paying off debt and start to “batten down the hatches.” Store money for cost-of-living expenses with nothing extra added and focus all of your attention on searching for new means of income.
You experience a death in your family
In Benjamin Franklin’s famous 1789 letter to French scientist Jean-Baptiste Le Roy, he wrote, “In this world, nothing is certain except death and taxes.” I hate to say it, but 235 years later, this quote still rings true.
It may shock you to find out that dying is expensive… financially and emotionally. According to the National Funeral Directors Association, the median cost of a funeral in 2024 is $8,300. In addition to basic funeral expenses, travel, lodging, food and end of life paperwork are also something to think about when tallying the cost of a death in the family.
During the grieving process, the last thing you want to think about is paying off debt, and you may not have the resources to continue to do so while you are handling things like life insurance, wills and potential family drama.
The best way to prepare for a significant personal loss is to prioritize having an emergency fund, especially if you have people in your family who are aging or in medical distress. Of course, we can never be truly ready for a death, but having cash stashed away for these events will put you in a better place.
I would also suggest having open conversations with your loved ones about estate planning and after-life preferences. Getting ahead on these difficult subjects can make the grieving process much easier.
You have a medical emergency
Health care costs are the leading cause of bankruptcy. In America, when you get cancer, break an arm or have to ride in an ambulance, it’s not just a medical emergency, but also a financial one as well. This is because health care isn’t universal and having coverage is more often than not tied to full-time employment.
When you experience a medical emergency, it’s time to put the brakes on debt payoff and focus on stopping the bleeding in the new expenses you’ve accrued. Wait for the hospital or doctor’s office to post your bill(s) so that you can negotiate it or total it with your other outstanding debts.
No. 3: Your emergency fund underprojects your needs
If your emergency fund isn’t the correct amount, or doesn’t match the level of your financial responsibility in life, you need to stop paying off debt and focus your energy and attention on filling up that emergency fund as quickly as possible.
It may extend your debt free journey, but so will constantly going into debt taking care of life’s little unexpected crisis.
Your emergency fund is dependent on many different factors. Here are a few things you should consider when you’re calculating your emergency fund total:
- What is your cost of living?
- Do you have children?
- Do you have pets?
- Do you rent or own?
- What condition is your home in if you own it?
- Do you work remotely, in-person or hybrid?
- Do you own your car or have a car note?
- What condition is your vehicle in?
- Do you have significant debt? Is debt 50% to 60% of your take-home pay?
If your emergency fund doesn’t have at least one month’s worth of expenses, stop everything you’re doing and save up this amount before proceeding with other financial goals. Once you are in a more financially stable place, you can bump that emergency fund up to three months.
An emergency fund, like anything in personal finance, is personal. The amount you set aside depends on your lifestyle, financial responsibilities and risk tolerance.
No. 4: You owe the IRS money
There are few things that scare me as a personal finance expert. One of them is the Internal Revenue Service.
If you have a past due bill with the IRS, stop everything else and pay off this debt first. The IRS has the power to seize property, freeze financial accounts, garnish wages and more if you don’t pay past due amounts. Owing back taxes can also negatively impact your credit score, which may take years to recover from. This is why it’s extremely important to take IRS debt seriously, make it your No. 1 priority and pay it off as quickly as possible.
If you have a tax bill that you are unable to pay in full, there are multiple options available to you outlined by the IRS.
No. 5: Your interest rate is 3% or less
If you have debt with an interest rate lower than 3%, congratulations. This means that you’re borrowing money at a very low cost.
Low-interest debt means you can focus on investing your money in low-cost index funds, paying off other debt or saving for large ticket items, like a car, house or vacation. When you have low-interest debt, it’s more about your personal preferences than it is about what is mathematically optimized.
Alternatively, if your 3% auto loan is driving you crazy and you just want to pay it off, I’m not going to say you shouldn’t pay it off. And if you’d rather put money toward potentially earning a 7% rate of return (10% when excluding inflation) from the S&P 500, knock yourself out. Both paths make sense and can benefit you in the long run.
If you have high-interest debt, which I define as debt at a 7% interest rate or more, pay it down immediately. This debt eats away at your monthly income, your net worth and your overall financial well-being.
Deciding to pay off medium interest debt, defined as 4% to 6%, while investing in the stock market depends on how long that debt will take to pay off. If paying off your student loans will take over five to 10 years, I’d invest simultaneously. A decade is a long time to miss out on compound interest. If you run the numbers and discover you can pay off your student loans in two years if you focus solely on that task, I’d put your full attention on getting those loans out of the way so you can invest more money as soon as possible.
Personal finance is personal and what you decide to do depends on what your life looks like and what your specific financial goals are.
Make money decisions that improve your quality of life
It may seem like paying off debt of any kind is the correct answer to where you should start and continue with personal finances. I hope this article encourages you to think about your particular situation and evaluate if paying off debt is actually the right thing to do for you in your current financial situation.
There is no shame in pausing debt payoff to address other financial concerns or because it is the best thing for you to do in your own circumstances.
Remember: Debt payoff is only one part of a much larger financial journey path… it is not an end-all-be-all.
