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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, is clear cut:

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

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

However, this rule doesn't apply to every situation. For example, mortgages, and certain loans, have fixed repayment terms that are not negotiable. If possible, you should 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 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
    Certain loans and borrowing 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, like credit cards
  • build an emergency savings fund, 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

Find out more about achieving your financial goals.

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