5 Scenarios When You Shouldn’t Pay Off Your Debt

The importance of paying off debt cannot be underestimated. Debt not only puts a strain on your overall financial circumstances; the financial worries are also scientific linked to physiological and psychological stress. But are there times when you shouldn’t focus on it? I say yes.

I spent most of my 20s paying off debt. If there was any debt you could have, I probably had it: student loans, credit card debt, medical debt, car loans, store loans… the list went on. Paying off debt 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, it was just focusing on paying off debt hurt my personal finances.

I made these mistakes so you don’t have to. Here are five scenarios when you shouldn’t pay off your debt.

#1: Your basic needs are not being met

The “four walls” are defined by food, housing, transportation, and utilities. These expenses are essential to daily living and without them, your life can be unstable. If you are unable to pay for food, housing, transportation, and utilities, you should focus on building a more solid foundation before you start paying off debt.

Paying off debt, saving money, investing, or doing anything other than covering your basic needs is a privilege. To make progress on financial goals, you need to have money left over every month outside of your four walls. If you don’t have anything extra, that’s where you need to focus your attention.

National statistics confirm the very real challenges of keeping pace with rising living costs. 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 facts from the Bureau of Labor Statistics.

Being in a situation where your basic needs are not being met is uncomfortable and scary. If you are in financial trouble, reach out to local organizations, nonprofits, and religious communities that offer financial assistance. You can search for organizations like these through your specific state and city websites.

No. 2: You have an unforeseen emergency in your life

There’s a reason personal finance experts stress that you should have 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 changes your life in a way that your emergency fund can’t cover, it’s time to put an end to your debt payoff journey.

What might that look like?

You lose your job

The biggest and most common emergency that can halt debt repayment is the loss of a major source of income. Mass layoffs, prolonged job searches, and inflation have made this traumatic event an increasingly common kink in the road to financial goals, including debt repayment.

And then we haven’t even talked about the loss of, for example, health insurance if you lose your full-time job.

If you are experiencing this or expect to experience this in the near future, stop paying off debt and start battening down the hatches. Set aside money for living expenses without adding anything extra and focus fully on finding new sources 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, the quote still rings true.

It may surprise you to learn that dying is expensive… financially and emotionally. According to the National Association of Funeral Directorsthe median cost of a funeral in 2024 is $8,300. In addition to the basic expenses of a funeral, travel, lodging, food, and end-of-life paperwork are also things to think about when calculating the cost of a death in the family.

The last thing you want to think about during the grieving process is paying off debts. And you may not have the resources to continue doing so while you are dealing with things like life insurance, wills, and potential family dramas.

The best way to prepare for a major personal loss is to prioritize having an emergency fund, especially if you have people in your family who are aging or in medical need. Of course, we can never be truly ready for a death, but having money set aside for these events will put you in a better position.

I would also suggest having open conversations with your loved ones about estate planning and afterlife preferences. Making progress on these difficult topics can make the grieving process much easier.

You have a medical emergency

Healthcare costs are the leading cause of bankruptcies. In America, getting cancer, breaking an arm, or having to ride in an ambulance isn’t just a medical emergency; it’s also a financial emergency. That’s because health care isn’t universal, and 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 payments and focus on stopping the bleeding in new expenses you’ve accrued. Wait for the hospital or doctor’s office to mail your bill(s) so you can negotiate them down or add them to your other outstanding debts.

#3: Your emergency fund doesn’t adequately predict your needs

If your emergency fund is not the right size or does not match your level of financial responsibility in life, you should stop paying off debt and focus your energy and attention on building that emergency fund as quickly as possible.

It may help you stay debt-free longer, but so will constantly being in debt to solve the small, unexpected crises in your life.

Your emergency fund depends on many different factors. Here are a few things to consider when calculating your emergency fund total:

• How much does it cost to live?
• Do you have children?
• Do you have pets?
• Are you a renter or an owner?
• What condition is your home in, if you own it?
• Do you work remotely, in person, or in a hybrid format?
• Do you own your car or do you have a car loan?
• What condition is your vehicle in?
• Do you have significant debt? Is the debt 50% to 60% of your net income?

If your emergency fund doesn’t have at least one month’s worth of expenses, stop everything you’re doing and save that amount before moving on to other financial goals. Once you’re more financially stable, you can increase that emergency fund to three months.

An emergency fund, like everything else in personal finance, is personal. The amount you set aside depends on your lifestyle, financial responsibilities, and risk tolerance.

#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 delinquent account with the IRS, stop everything and pay off that debt first. The IRS has the power to seize property, freeze financial accounts, garnish wages and more if you do not pay overdue amounts. Overdue taxes can also have a negative impact affect your credit scorethat can take years to recover from. That’s why it’s incredibly important to take IRS debt seriously, make it your top 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 several options available outlined by the IRS.

No. 5: Your interest rate is 3% or less

If you have debts with an interest rate below 3%, congratulations. This means that you are 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 debts, or saving for big expenses like a car, house, or vacation. When you have low interest debt, it’s more about your personal preferences than what’s mathematically optimized.

Alternatively, if your 3% car loan is driving you crazy and you just want to pay it off, I’m not saying don’t pay it off. And if you’d rather put your money into potentially earning a 7% return (10% excluding inflation) from the S&P 500, then go for it. Both paths make sense and can benefit you in the long run.

If you have high interest debt, which I define as debt with an interest rate of 7% or more, pay it off immediately. This debt is eating away at your monthly income, your net worth, and your overall financial well-being.

Deciding to pay off debt with an average interest rate, defined as 4% to 6%, while investing in the stock market depends on how long it will take to pay off that debt. If paying off your student loans is going to take more than five to 10 years, I would invest at the same time. A decade is a long time to miss out on compound interest. If you crunch the numbers and find that you can pay off your student loans in two years if you focus solely on that task, I would focus your full attention on paying off those loans so you can invest more money as soon as possible.

Personal finance is personal and what you decide to do will depend on what your life looks like and what your specific financial goals are.

Make financial decisions that improve your quality of life

It may seem like paying off debt of any kind is the right answer to the question of where to start and continue with personal finance. I hope this article encourages you to think about your specific situation and evaluate whether paying off debt is actually the right thing to do in your current financial situation.

There is no shame in putting off paying off debt to address other financial concerns or because it is the best thing to do in your particular situation.

Remember: paying off debt is just one part of a much larger financial path… it is not an all-encompassing goal.