Should you save or pay off debt?
Deciding whether to save or pay off debt can feel like a balancing act. This guide helps you weigh up what to do. First by comparing interest rates, building an emergency fund, and understanding the difference between ‘good debt’ that may support long-term goals and ‘bad debt’ that can cost you more over time.
Here, we look at:
When to prioritise debt over savings
When to prioritise savings over debt
When to prioritise debt over savings
Compare interest rates
Look at how much interest you’ll be charged on debt versus how much interest you’ll earn through saving.
If the interest charged is greater than the interest you earn, it might be a good idea to put money towards repaying debt before building your savings.
Clear short-term borrowing
It’s typically best to clear debt from short-term borrowing options like credit cards, store cards, and overdrafts as quickly as you can. Paying these balances off reduces the amount of interest you pay over time.
Emergency fund
Also, consider what funds you have available in case of an emergency. Ideally, you should have an emergency savings fund that can cover at least 3 months’ worth of living expenses.
But until then, having the balance available through a credit card can, at least, help put your mind at ease and bring you closer to managing your finances.
When to prioritise savings over debt
Cover regular payments
Some debts don’t need to be paid off straight away. For example, with a mortgage or personal loan, you’re likely to have an agreement with your bank about how much you repay a month.
Once you’ve covered those repayments, any extra funds can go into your savings.
Focus on your emergency fund
If you don’t have anything specific to save for, you may want to build an emergency fund. Knowing you have a financial safety net can give you peace of mind.
Look at long-term savings options
Once you have an emergency fund, consider what’s important to you. You may want to:
-
Make overpayments on your mortgage or personal loan (check if there’s a charge to do this)
-
Consider investing for the long term
-
Add money to your pension to take advantage of tax allowances
Understanding good debt vs bad debt
As well as knowing when to repay debt and when to save, being a savvy borrower means knowing the difference between types of debt. You may have heard people speak about good debt and bad debt.
What makes good debt
Good debt may help you become better off over the longer term.
It could be for:
-
Education
-
Buying a home
-
Buying something that helps you earn an income
Recognising bad debt
Bad debt can cost you a lot of money and not leave you financially better off.
It could be for:
-
Items that won’t grow in value, like a holiday or car
-
Paying bills, or covering everyday expenses
Remember, not all long-term borrowing is good, and not all short-term borrowing is bad. For example, if you use your credit card but repay it in full each month – you might not be charged any interest, depending on the types of transactions you make.
Or, if you have a big mortgage and you’re struggling to meet other costs, it’s not necessarily ‘good debt’.
Summary
Understanding when to save and when to repay debt helps you manage your money well. Set clear goals and balance what matters most. Compare interest rates so you can choose the best option. By knowing the difference between good and bad debt, you can take control of your financial future. Review your budget today to see where your money can work hardest for you.
This article was last updated: 24/06/2026, 08:26
