Is it better to borrow money or save it up? It depends greatly on the context. There are those who will tell you to avoid debt of any kind. However, there are times when saving up money for something can be infeasible – unless you’re making a huge income. It’s always good to have some savings. But borrowing money can have its benefits too, providing you do it sparingly and can pay it back. Let’s take a look at some of the key instances when it’s better to use debt and when it’s better to use savings. 

Use debt when you have no savings and it’s an emergency

It’s wise to always have a savings pot. But if your savings have run dry and an emergency cost comes along (such as a home repair or a medical bill), you’ll have no choice but to borrow.

 In these cases, think carefully as to where you borrow money from. There are emergency loan lenders that prey on people that need a loan last minute – often charging insanely high interest rates. Bank loans can have lower interest, but can take longer to process. The best option can often be to use a credit union, use a low interest credit card or borrow from friends/family.

Save up money for larger purchases that aren’t essential

You shouldn’t be using debt to pay for vacations or buy designer clothes. These are things that you should save up for in order to make them more rewarding. Having to pay for them later could cause you to regret these purchases.

An exception is interest-free payment plans. These can be a way to spread out the cost of something without paying extra in interest fees. However, you still need to make sure you can reasonably afford the monthly repayments. 

Use debt for tiny things to build up your credit score

Having some debt is essential for maintaining a healthy credit score. This is why it can be worth paying for small purchases occasionally using a credit card. 

Some credit cards even offer rewards that can offset any interest fees you may pay. At the same time, you’ll be building up your credit score. It’s recommended for young people who aren’t paying any regular bills.

Use savings to pay off your debts if you can

Experts like Alex Kleyner recommend using savings to pay off debt. Paying off your debt more quickly can reduce the amount of interest you pay in the long run – making it a worthy investment.

Of course, you do have to be careful of loans with early repayment fees. Before taking out any loan, always look at these hidden fees so that you know you still have the option of paying the loan back early without being penalized. 

Use debt to invest in things that will make you a return – and that you couldn’t possibly save up for

Debt can sometimes be a necessary tool for investing in things that could make you money in the future. The majority of modern businesses are launched using loans – you could spend years raising the necessary startup costs, by which point startup costs may have risen even more due to inflation. Similarly, few people can save up to buy a house in cash – a mortgage is almost always necessary and can ultimately allow you access to an asset that appreciates in value.

Just be certain that whatever you are investing in will make you a return. Using a loan to pay for something that you cannot be certain will make you a return is essentially gambling – you could then end up paying off a loan for something that you made a loss on. This guide by Reju Mehta delves more into the difference between investing and gambling. 

Use savings as insurance to protect yourself from unforeseen emergency costs

Finally, let’s go full circle and discuss emergency costs again. While you cannot always predict certain costs such as car repairs or vet bills, you can prepare for them by building an emergency savings fund. This could reduce your reliance on emergency loans in the future.

When building such a savings fund, be strict about its purpose. Only use this money for true ‘emergencies’. When it comes to personal luxuries, set up a separate savings account for these. This will discourage you from using emergency savings to fund luxuries that you don’t need so that you’ve always got money behind you when disaster strikes. Of course, if you have to pay for an emergency using all of your emergency savings and a second emergency occurs immediately after, you may have no choice but to then borrow (but at least you’re not having to borrow money for too emergencies).