By Michael Landsberg, CPA/PFS, member of the AICPA National CPA Financial Literacy Commission

For far too many, the Coronavirus pandemic has caused an unexpected financial crisis unlike anything they’ve experienced before. Hopefully this is a once-in-a-lifetime event, but the fact remains that individuals and families have been put in a precarious financial situation. Over 44 million people have applied for unemployment benefits during this pandemic and, as of mid-June, the unemployment rate was in the mid-teens. With job stability in question for many and bills still requiring payment, it’s understandable that a lot of Americans feel as if they’re stuck between a rock and a hard place. How can you decide between saving for important goals and paying down debt balances? Truthfully, much of it is a matter of balance. While every situation is unique, here are some common rules of thumb.

Compare the Payoff (interest costs vs. interest earned)

When you’re considering paying down debt versus building savings, the analysis generally comes down to “opportunity cost.” The two main considerations are the return you’re “giving up” by paying down debt and what the interest rate is of said debt. If you believe you can earn 7% annually on an investment, but your credit card debt is accruing at 18%, you should opt to pay down the credit card debt because your credit card bill will be growing faster than your investment. Since there’s almost nothing guaranteed as far as investment returns go, there’s seldom a compelling justification to forgo paying down high-interest debt.

Focus on overdue & high-interest debts

If you’ve fallen behind on payments, try your best to catch up so you can avoid additional interest, penalties or other negative consequences (like a lower credit score). Your first step should be to find additional funds to cover your payments. Start by trimming expenses. It is rarely an easy endeavor but can help you find money to cover your bills. Next, focus on eliminating debt with the highest interest rates. Those bills tend to grow the fastest, so you want to keep them from getting out of hand.

Be Prepared for Emergencies 

You’ve likely heard about “emergency funds” but have never truly been in a situation where they were necessary. With millions unemployed, emergency funds have come to the forefront and acted as a life-raft for those finding themselves out of a job or furloughed for extended periods of time as they wait for unemployment benefits. Depending on the size of your household, having 6 months’ worth of expenses tucked away in cash is smart and will hopefully supplement decreased or suspended paychecks during any financial crisis.

Don’t Forget About Retirement

It’s never too soon to start saving for retirement. The longer you save, the more time your money has to grow. Once you’re keeping up with debt payments, lowering outstanding balances, and building an emergency fund, it is time to start looking to put excess cash to your retirement savings. A situation where it could make sense to save before paying off debt is if your employer offers a match for retirement plan contributions. Try to contribute at least enough to get the maximum employer match. If you aren’t doing this, you’re effectively turning away free money!

Overall, you should consider your full financial picture when making any monetary decisions. Know when you might need help and consider any additional resources that would be available should you run into financial hardship. There are myriad free options online or credit counseling resources that could prove invaluable. This is truly an unprecedented time for many Americans but using the above-mentioned recommendations will help you come out the other side of this much stronger and financially secure.