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Should I save or pay off debt?

While it's important to get into a savings habit, you should also make sure you can manage any high-interest debt you have. So should you save first or pay off debt? In purely financial terms, the choice is clear:

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

For example, let's say you earn 2% interest from your savings account, but you're paying 26.8% interest on your credit card debt. It would be more sensible to prioritise paying off the credit card debt rather than putting money into the savings account.

But this isn't a rule that applies to every situation. Certain loans, like mortgages, have fixed repayment terms that are not negotiable. If you can, you should try to build up your savings in addition to repaying those loans.

There are 3 key things you should consider in deciding whether you should prioritise saving or paying off debt first:

Interest rate – If you have high-interest debt, such as from loans and credit cards, you should prioritise paying off debt, starting from the debt that charges the highest interest rate.

Unexpected costs – It may be sensible to build up an emergency savings fund to cover unexpected costs, before focusing on paying off debt.

Early repayments and break fees – Certain loans come with penalties or fees if you repay them early, so check the terms of your loan carefully before opting for an early repayment.

Depending on your circumstances, a blended approach could make sense:

  • tackle high-interest debt first, like credit cards and loans
  • build an emergency savings fund next, to cover unexpected costs such as home repairs, family expenses or unemployment
  • get into a savings habit by putting a regular amount of money into a savings account each month
  • create a plan to pay off any lower-interest, longer-term debt
  • plan savings for the longer term to help you achieve your financial goals
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