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Save? Or Pay Off Debt?

Getting into a savings habit is important, but so is making sure that you can manage any high interest debts you have. In purely financial terms, deciding whether to pay off a debt, or to start saving regularly, can be simple:

If you're paying more interest on your loan or debt than you're earning on your savings, it makes sense to pay off the debt first.

For example, if you have savings in an account earning 2% interest, and you have credit card debt that you're paying 19% interest on, you would be better off to pay off the credit card debt first, before putting money into the savings account.

However, this isn’t a rule that applies to every situation. For example, mortgages and certain loans have fixed repayment terms that are not negotiable. If possible, it would be wise to try and build up savings in addition to making those payments.

There are 3 key things to consider:

  1. Interest rate
    If you have high interest debt, such as payday loans and credit cards, these should usually be your number one priority. If you have several debts, it's typically best to prioritise the ones charging the highest interest rates first.
  2. Unexpected costs
    It may be sensible to build up an emergency savings fund, to cover unexpected costs, before focusing on paying down other debt.
  3. Early repayments and break fees
    Mortgages and certain loans come with penalties or fees if you pay them back early. You should check the terms of any borrowing carefully before opting for an early repayment.

A blended approach could make sense. Referring to the example above, you might:

  • tackle high interest debt first, like credit cards and payday loans
  • build an emergency savings fund next, to meet unexpected costs like home repairs or losing your job
  • get into a savings habit by putting a regular amount each month into a savings account
  • make a plan to pay off lower interest, longer term debts
  • plan longer term savings to meet your financial goals
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