Dear Penny: Should I Invest My $10K Savings or Use It to Pay Off Debt?

Dear K.,

My vote is for “none of the above.” (Wait, that is an option, right?)

Assuming the $10,000 is your only non-retirement savings, I’d suggest you keep it as liquid savings.

I know, I know: When you’re paying interest on debt and you have investments that are (hopefully) gaining value, your pile of cash can look a lot like your lazy relative who hogs the couch and the remote but doesn’t contribute. And you want to scream: Just. Do. Something. But then when you really need something, they come through.

Cash doesn’t do much in the way of earning interest, but you need it as a lifeline in case of an emergency. Generally, the recommendation is to have at least three to six months’ worth of expenses saved in a rainy-day fund. 

Consider that if you’re earning $58,000 a year, $10,000 might only replace three or four months of your net income if you were temporarily unable to work or you lost your job — so $10,000 is probably the minimum you should have sitting around in cash.

The good news is, it sounds like your finances are in pretty good shape. Your debt isn’t insurmountable, and you’re the rare 30-year-old who has nearly one year’s salary saved for retirement — which is the recommended retirement savings based on your age. 

You’re also relatively young, you’re single and you don’t own your home — and while we all need to be prepared for emergencies, your odds of a major unexpected expense are probably lower compared with, say, a 55-year-old with a family of five who owns a home with a roof that hasn’t been replaced in 40 years.

So provided that you’re in relatively good health, your check engine light isn’t on and you don’t have reason to believe your employer will replace you with a robot soon, I’ll give you my blessing to keep your emergency fund at the lower end of the three-to-six-month range. 

That means if $10,000 would cover at least three months of your expenses, I won’t bug you to keep socking away more in your emergency fund for now, and you can start putting any monthly excess toward one of your financial goals.

Personally, I’d opt for using whatever extra money you can to pay down your debt over investing. Sure, the interest on your debt may be lower than the potential gains in the stock market. But as you put it, investing would be a gamble — and with the stock market’s volatility and renewed concerns about a recession, you’d need to be prepared for the possibility that your investment could tank, at least temporarily. 

By paying down debt, you’re getting guaranteed returns in a sense, because you’re guaranteed to save on interest, and you’ll also lower your monthly expenses, eventually.

As for the $10,000, you can still put it to work a little by putting it in a high-yield savings account or money market account, which can typically earn you 2% interest or more — unfortunately, a far cry from the 7% or 8% returns we’re often told to expect from the market on average, but still better than the 0.09% the average savings account currently pays.

Just remember that this $10,000 is there for an emergency. Keep it in an account that’s separate from any money you’re saving for a big goal, like a home purchase. Your goal with this money is to look but don’t touch — unless absolutely necessary.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your questions about saving money to [email protected].