Article Should you save or pay down debt?

Building up your savings and paying down debt both contribute to having good financial wellbeing. This means that choosing which goal to prioritise can be a difficult decision. In this article, we’ll provide you with some pointers to help you decide what you should focus on first.

Please note that what’s right for you will depend on your personal circumstances. But, as a rule of thumb, if you have short-term high-interest debts, you could consider paying them off before focusing on saving.

First, lets break the stigma – having debt is normal

Having some sort of debt is entirely normal. Borrowing allows us to be more flexible with our finances and provides opportunities we wouldn't otherwise have – like buying a house with a mortgage.

However, debt can also cause financial stress, and having too much of it could mean you struggle to meet repayments. If you have debt, paying it down is likely to be an important priority so you can free up your money to meet your other financial goals. Still, saving money is a sensible and important thing to do. For example, without an emergency savings fund, you may have to resort to borrowing more in the case of an unexpected expense.

Here are some tips to consider when deciding between saving and paying down debt.

1. Create a written plan

Before you start allocating extra money toward debt payments, it's a good idea to make sure you have a written plan. A good plan takes into account what gives you joy and purpose, as well as your money goals. Keeping your plan updated as your circumstances change can help to keep your goals current and on track.

Once you have a clearer idea of what you want to achieve, you can start to work out how your current finances fit in. It might be overwhelming to list all your debts, especially if they come from more than one source. But doing so might give you a better idea of what to tackle first. For example, will you focus on paying off the debt with a higher interest rate first, or will you pay off the smallest debt amount first?

Remember that if you're focusing on paying down one source of debt, you’ll need to make at least the minimum payments on your other debts.

2. 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. And those rising rates could delay your progress. When your money is consumed by high-interest payments, you’ll likely have more difficulty trying to save or meet other financial goals. 

3. 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. If this is the case with your debt, it may not be worth overpaying. Instead, you might choose to prioritise saving money and continue to make debt payments on schedule. 

4. 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.¹

5. Are you ready to save?

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.

Our research finds that 51% of people can’t support themselves for more than three months through their savings.² If you haven’t already, consider creating a financial safety net to fall back on. A good aim is to save at least 3 months’ worth of easily accessible savings so you’re equipped for any unexpected costs you might face. You can read more about the benefits of an emergency fund in our Financial wellbeing index.

Beyond an emergency fund, you’ll likely have lots of other saving goals you’d like to achieve. Read more tips on doing so in our article 3 simple steps to hit your saving goals.

Next steps

Taking time to examine your financial situation and make priorities for your income is the first step toward reaching your financial goals. With our tips to get you started, we hope you’ll have a clearer idea of what to think about and how to progress towards 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, it's recommended to seek financial assistance. MoneyHelper a government-backed service, provides free and impartial guidance to help clarify your money and pension choices. They have a range of guides on dealing with debt  that might be helpful if you need extra support.