Article Should you prioritise saving or paying down debt?

Choosing between saving or paying down debt can be a difficult decision. If you have debt, paying down those debts is likely to be an important priority – so you can free up your money to meet other financial goals. Still, saving money is a sensible and important thing to do. Without an emergency savings fund, you may have to resort to borrowing more in the case of an unexpected expense.

Firstly, it’s important to break the stigma around debt. Most of us have some type of debt – a mortgage, on credit cards or debt they collected as a student – and that’s ok. The problem is when our repayments get too close to the level or, or exceed, our monthly income. When this happens, companies might charge us more to borrow as they view us as riskier. This in turn makes being in debt more expensive and harder to escape.

What is right for you will depend on your personal circumstances. Generally, if you have short-term high interest debts, consider paying this off before you focus on saving. 

Make a plan

Before you start throwing extra money toward debt payments, it’s a good idea to make sure you have a plan. Our research has found that writing down your goals really does help you achieve them.¹ It may be overwhelming to write out your debts if it’s coming from more than one source but doing so can help you organise which one you’re going to tackle first.

In addition to developing an overall financial plan, think about building a plan for how to pay off debt. For example, will you focus on paying off the debt with the highest interest rate first? Or will you pay off the smallest debt amount first? 

Remember when you’re focusing on paying down one source of debt, you might need to make at least the minimum payments on your other debts as well.

Think about checking interest rates

Keep in mind that with credit cards and some other types of consumer debt, high interest rates can increase unexpectedly. Those rising rates can stall you financially, in some cases not allowing you to progress for years. When your money is consumed by high-interest payments, you’ll have much more difficulty trying to save or meet other financial goals.

Look out for penalty fees

Some types of debt, such as mortgages and other loans, might charge penalty fees if you pay them off early or make additional payments. Check to see if your debts require early repayment fees. If they do, the wisest action may be to prioritise saving money and continue to make payments on schedule.

Remember that not all debt needs to be prioritised

If your debts include student loans, remember that they work differently than most other debt. Repaying your student loan differs on what repayment plan you are on – which depends on where in the UK you are from and when you studied. As a result, you may find you aren’t required to pay anything toward your student loans until after you earn a certain amount. And, if you graduated after 2012, your student loan will get written off if it hasn’t been repaid after 30 years.²

Are you ready to save?

If your debt is at a manageable level, you might want to think about saving. If you’re keeping up with mortgage payments, paying off any credit card bills each month and don’t have any other loans then you may want to think about your saving goals.

If you have no savings at all, or very little emergency savings, it may be a good idea to try and see if you can maintain your debt repayments and build a rainy-day fund. One-third of people in the UK have no emergency savings – but just putting away a little bit each month can add up quickly. By having a rainy day fund, you would be better equipped to handle a wide variety of unexpected expenses.³ You can read more about the benefits of a rainy day fund in our Financial Wellbeing Flipbook.

Next steps

Taking time to examine your financial situation and make priorities for your income is the first step toward reaching your financial goals. Figure out the right priorities for your money, make a plan and start progressing toward the financial future you want.

The information in this article is not intended to be financial advice. If you’re unsure about your finances in any way, consider seeking financial advice. As we say, what is right for you will depend on your personal circumstances and a financial adviser gives catered advice based on what is best for you. You can find one near you by visiting MoneyHelper.