What's the general principle behind choosing saving vs. paying off debt?
It has to do with return. I don't know if Canada has a matching feature on retirement accounts, but in the US many companies will match the first X% you put in. So for me, my first $5000 or so is matched 100%. I'll take that match over paying down any debt. Beyond that, of course it's a simple matter of rate of return. Why save in the bank at 2% when you owe at 10-18%?  One can make this as simple or convoluted as they like. My mortgage is a tax deduction so my 5% mortgage costs me 3.6%. I've continued to invest rather than pay the mortgage too early, as my retirement account is with pre-tax dollars. So $72 will put $100 in that account. Even in this last decade, bad as it was, I got more than 3.6% return. Debt creates risk.  Plain and simple.  Comparing interest rates of debt vs. possible investing.  To me, it is all meaningless.  When you are in debt, you options are limited.  If you are not in debt, you have more freedom. To me, it is a no brainer.  Become debt free ASAP. "Think of yourself as a business with two accounts, ""cash"" and ""net worth"". Your goal is to make money. ""Cash"" is what you need to meet your obligations. You need to pay your rent/mortgage, utilities, buy food, pay for transportation, service debt, etc. If you make $100 a month, and your obligations are $90, you're clearing $10. ""Net worth"" are assets that you own, including cash, retirement savings, investments, or even tangible goods like real property or items you collect with value. The ""pay off debt"" versus ""save money"" debate, in my opinion, is driven by two things, in this order: If you start saving too soon, you'll have a hard time getting by when your car suddenly needs a $500 repair or you need a new furnace. You need to improve your cash flow so that you actually have discretionary income. Pay off those credit cards, then start directing those old payments into savings and investments." Depends upon the debt cost. Assuming it is consumer debt or credit card debt, it is better to pay that off first, it is the best investment you can make. Let's say it is credit card debt. If you pay 18% interst and have for example a $1,000 amount. If you pay it off you save $180 in interest ($1,000 times 18%). You would have to earn 18% on 1,000 to generate $180  if it was in aninvestment. Here is a link discussing ways of reducing debt Once you have debt paid off you have the cashflow to begin building wealth. The key is in the cashflow.
"Time-Barred Debts and STATE STATUTES OF LIMITATION ON COLLECTING DEBTS are good places to start on the issues of what can be collected and for how long. What seems to be at issue is bankruptcy vs. time-barred debts vs. what creditors (original debt owners, not collection agencies or those who buy debt) can do. You should also check out The Fair Credit Reporting Act which governs some of the question.  The Fair Credit Reporting Act and the section on time-barred debts applies to collection agencies, etc. (so-called debt owners as pointed out by @littleadv, since they buy debt from the creditors) not actual creditors (those the debt is/was originally owed to). Creditors (those to whom the debt was originally owed) have different rules than debt collectors and can do things debt collectors can't. State law generally governs what creditors, as original owners of the debt, can do legally and for how long. Bankruptcy Bankruptcy is a legal action that frees someone from paying all or part of debt owed (they are crying ""Uncle!"" and stating they don't have enough money to pay their creditors). On a credit report, accounts will generally be updated to show “included in bankruptcy"" or similar. Debt that is determined to still be owed often will be reduced in amount/payments. Time-barred Debts Time-barred debts are debts that are still owed, but cannot be collected through direct legal action (suing). Each state has its own statute of limitations on how long different types of debt can be collected by suing after initial default before being considered time-barred. This period is typically 3-6 years but a few states such as Kentucky allow much longer time periods (up to 15 years). Being a time-barred debt does NOT prevent a collector from contacting someone about a debt. Collectors can still try to collect a debt forever -- and probably will -- but they can't normally sue and collect payment once the statute of limitations period has passed. There are gotchas with time-barred debts regarding collection, however, which can make them still legally actionable. Making any payment, no matter how small, making a verbal commitment to pay or even acknowledging the time-barred debt is often enough to make the debt legally collectable, even if it would normally be past the statute of limitations for collection. This is again state-dependent, but it is a pitfall for many people. The process of making a debt collectable again is often called ""re-aging"". Re-aging essentially means the clock starts anew on the statute of limitations, extending the time that a creditor may use the courts to collect that debt. If someone is taken to court over a time-barred debt that is legally noncollectable (has not been legally re-aged), nothing happens to them. However, being time-barred does not prevent legal action in the sense that you still have to prove the debt is time-barred and noncollectable in court if your sued over it.  Being time-barred does not mean the debt ""dissolves"". A debt is always owed unless the debt has been forgiven or discharged in bankruptcy court. This means that, combined with the ability of debt collectors to contact someone about out of statute debt and the pitfalls of re-aging, it is entirely possible for a debt collector to get a 20 year old debt actionable again. Also note that while someone is trying to dodge a debt to make it time-barred (e.g. by not paying anything), creditors and debt collectors can still take legal action to sue over the debt, and if they get a judgment against someone, this can extend the debt indefinitely. Judgements will eventually lapse, but often only after 10 years or more, and many states allow dormant judgements to be ""revived"" within that time period. Credit Reports  Regarding credit reports, whether someone owes a debt and whether it appears on a credit report are two separate things. As previously stated, no debt ""dissolves"" or goes away unless some sort of legal action makes it so.  As far as reporting is concerned, however, most ""bad"" credit stops being reported after seven years (by federal law). That is, accounts on a credit report will be deleted seven years from the original delinquency dates of the accounts regardless of being included in bankruptcy or as time-barred debt. This assumes no legal process allows the account to continue being reported (as is often the case with re-aging). As an FYI, a bankruptcy discharge date has nothing to do with when account information will be removed from your credit report.  Note that some debts, such as tax liens, can be reported indefinitely. Should bankruptcy be considered? The decision to do bankruptcy is mostly a matter of how severe the debt is. If it is an extremely large amount and assets are very small, bankruptcy is a good route in so far as it will legally take care of a lot of loose ends and likely relieve most or all of the burden of actually owing the money. Credit-wise, 10 years is the maximum a bankruptcy (specifically) will appear on a credit report. Accounts may drop off a credit report before bankruptcy because they are past the seven years they can be legally reported. Debts owed to the state such as child support, student loans, income tax, etc. generally cannot be written off and aren't subject normal debt statute of limitations on collection.  Finally, bad credit is bad credit -- there is likely to be little difference in terms of ability to get loans between bankruptcy and attempting to dodge legal action to make debts time-barred. If the debt is significant, bankruptcy may be the only sensible option." Paying off your mortgage early being good is a myth.  It is great for the chronic overspenders to have their mortgage paid off so when they rack up credit card bills and get behind, well they still hae a place to stay. But for those who are more logical with their money paying off your mortgage early in current conditions makes no sense.  You can get a 30 year loan well below 4%.  Discounting taxes for your average family you would have a rate floating below 3%.   So reasons that paying off your mortgage should be almost LAST (given current low long-term interest rates): The first thing you should do is take care of any high interest debt.  I would say that anything more than 7-8%, including all credit card debt should be focus #1. putting money into your retirement savings is #1.  You will earn way more than 3% over the long-run.  you can earn a higher return in the market.  Even with a very conservative portfolio you can clear 5-6%, which will still clear more than 3% after taxes. for those who say you can't be sure about the market... well if the market did bad for 30 years in a row no one will have money and the house will also be worthless. if a disaster happens to your house and you own it, your money is gone.  In many cases you would be able to declare bankruptcy and let the bank take the property as is.   there are just too many examples but if you are paying off your house early, you lose the flexible/liquid money that you now have tied up in the house. Now the reasons for paying down your mortgage are really easy too: you don't trust your spending habits you want to move up in houses and you want to make sure that you have at least 20% down on future house to skip PMI. This is a slightly different reason to any other answer I have seen here about irrationality and how being rationally aware of one's irrationality (in the future or in different circumstances) can lead you to make decisions which on the face of it seem wrong. First of all, why do people sometimes maintain balances on high-interest debt when they have savings? Standard advice on many money-management sites and forums is to withdraw the savings to pay down the debt. However, I think there is a problem with this. Suppose you have $5,000 in a savings account, and a $2,000 credit card balance. You are paying more interest on the credit card than you get from the savings account, and it seems that you should withdraw some money from the savings account, and pay off the cc. However, the difference between the two scenarios, other than the interest you lose by keeping the cc balance, is your motivation for saving. If you have a credit card balance of $2,000, you might be obliged to pay a minimum payment of $100 each month. If you have any extra money, you will be rewarded if you pay more in to the credit card, by seeing the balance go down and understanding that you will soon be free from receiving this awful bill each month. To maintain your savings goal, it's enough to agree with yourself that you won't do any new spending on the cc, or withdraw any savings.  Now suppose that you decide to pay off the cc with the savings. There is now nothing 'forcing' you to save $100 each month. When you get to the end of the month, you have to motivate yourself that you will be adding spare cash to your $3,000 savings balance, rather than that you 'have to' pay down your cc. Yes, if you spend the spare cash instead of saving it, you get something in return for it. But it is possible that spending $140 on small-scale discretionary spending (things you don't need) actually gets you less for your money than paying the credit card company $40 interest and saving $100? You might even be tempted to start spending on your credit card again, knowing that you have a 0 balance, and that you 'can always pay it off out of savings'. It's easy to analogize this to a situation with two types of debt. Suppose that you have a $2,000 debt to your parents with no interest and a $2,000 loan at high interest, and you get a $2,000 windfall. Let's assume that your parents don't need the money in a hurry and aren't hassling you to pay them (otherwise you could consider the guilt or the hassle as a form of emotional interest rate). Might it not be better to pay your parents off? If you do, you are likely to keep paying off your loan out of necessity of making the regular payments. In 20 paychecks (or whatever) you might be debt free. If you pay off your loan, you lose the incentive to save. After 20 months you still owe your parents $2,000. I am not saying that this is always what makes sense. Just that it could make sense. Note that this is an opposite to the 'Debt Snowball' method. That method says that it's better to pay off small debts, because that way you have more free cash flow to pay off the larger debts. The above argues that this is a bad idea, because you might spend the increased cash flow on junk. It would be better to keep around as many things as possible which have minimum payments, because it restricts you to paying things rather than gives you the choice of whether to save or spend. While C/C's have 0% interest this a good mechanism to manage debt. But they expect you will pile up a large debt and at then of the interest free period you will get hammered. So plan your exit strategy.  Plan to pay off the 0% cards at the end of the int free period and pay the other cards down. Alternatively, What you could do is pay off the other cards now by drawing down on the 0% card if its possible. Then.all your debt is at 0% int. Also you are consolidating your debt into 1 account. When the int free period is over move the debt into a single personal loan if you don't plan on paying it all off immrdiatley In the meantime put you savings into an interest bearing account to maximize the value of your savings. Common investment advice recommends paying off all debt before you invest.  This is certainly not debated when the debt is credit card debt or other high interest debt.  Some would argue this doesn't necessarily apply to school debt or mortgage debt, however its not clear what to suggest.  Since any investment you make is unknown whether you will win or lose money, and every debt you have is guaranteed to be a loss via interest, its almost always a good idea to pay off all of your debt first. You would have to do the specific math with your specific situation to be certain, but - generally speaking it would be smarter to use extra money to pay down the principle faster on the original loan. Your ability to refinance in the future at a more favorable rate is an unknowable uncertainty, subject to a number of conditions (only some of which you can control). But what is almost always a complete certainty is that paying off a debt is, on net, better than putting the same money into a low-yield savings account. What you propose is to convert unsecured debt into secured debt. Conversion of unsecured debt into secured debt is not generally a good idea (several reasons).  The debt you currently owe does not have assets securing the debt, so the creditor knows they are exposed to risk, and may be more willing to negotiate or relax terms on the debt, should you encounter problems.  When you provide an asset to secure debt, you lose freedom to sell that asset.  When you incur debt their is usually a spending problem that needs to be corrected, which is typically not fixed when a refinance solution is used.  You do not mention interest rate, which would be one benefit to conversion of unsecured to secured debt, so you probably are not gaining adequate benefit from the conversion strategy. This strategy is often contemplated using 'cash-out' refinancing to borrow against a home you already own, and the (claimed) benefit is often to lower the interest rate on the debt.  Your scenario is more complicated in that you have not purchased the home (yet).  Though it may be a good idea to purchase a home, that choice depends on a different set of considerations (children, job stability, rental vs. buy costs, lifestyle, expected appreciation, etc) from how to best handle a large debt (income vs. expenses, how to increase income or reduce expenses, lifestyle, priorities, etc). Another consideration is that you already have a problem with the large debt owed to one (set of) creditor(s), and you have a plan which would shift the risk/exposure to another (set of) creditor(s) who may have been less complicit in accruing the original debt.  Was the debt incurred jointly during the marriage, and something you accepted responsibility to repay? You mention that you make great income, and you specify one expense (rent), but you neither provided the amount of income, total of all your expenses, nor your free cash flow amount, nor any indication of percentages spent on rent, essential expenses, lifestyle, nor amount available to retire debt.  Since you did not provide specifics, we can take a look at three scenarios, scenario #1, $4000/month income scenario #1, $6000/month income scenario #1, $8000/month income Depending upon your income and choices, you might have < $500/month to pay towards debt, or as much as $3000/month to pay towards debt, and depending upon interest rate (which OP did not provide), this debt could take < 2 years to pay or > 5 years to pay. Have you accepted the responsibility for the debt?  It will be a tough task to repay the debt.  And you will learn that debt comes with a cost as you repay it.  One problem people often encounter when they refinance debt is they have not changed the habits which produced the debt.  So they often continue their spending habits and incur new unsecured debt, landing them back in the same problem position, but with the increased secured debt combined with additional new unsecured debt.  Challenge yourself to repay a specific portion of the debt in a specific time, and consider ways to reduce your expenses (and/or increase your income) to provide more money to repay the debt quicker. As you also did not disclose your assets, it is hard to know whether you could repay a portion of the debt from assets you already own.  It makes sense to sell assets that have a low (or zero) return to repay debt that has a high interest rate.  Perhaps you have substantial assets that you are reluctant to sell, but that you could sell to repay a large part of the debt? As the other answers indicate, if you look only at the clear mathematical formulas regarding your debts and their interest rates, then you'll see that it's better (less expensive) to pay off your student debt first.  However, you must also take into account the value of your car, as it is an asset. The older your car gets, the less it's worth. The more your car gets used and worn out, the less it's worth. Cars depreciate at about 15% per year on average. However, you're continuing to pay the same amount of money to keep a decreasingly valuable asset. Now, you also have to include the fact that you may be required to carry full-coverage car insurance, versus liability insurance. This can represent an increase in spending if you'd prefer to have liability only. With insurance in the picture, you should also be thinking about the possibility that something could happen to your vehicle that causes it to be worth less than you owe, or just worthless. If such an event happens, then you may have more difficulty acquiring a replacement vehicle. I, personally, don't find the increase in total interest paid on student loans to offset the other consideration regarding the value of a car. I'm in a similar situation as you (except your values are all about double what mine are). The peace of mind I gain from being able to pay off the car more quickly, and use that money towards loans or whatever I want, is worth the interest I'll earn by not putting that money into the student loans instead. I also prefer the idea of being able to more easily use my vehicle as a trade in, in case I need to get a different vehicle to better suit my family size.