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Should you save or pay off debt?

If you’re not sure whether you should save or repay debts, read our tips on when to prioritise debt over saving, and the difference between good debt and bad debt.

When to prioritise debt over savings

The best place to start, is looking at how much interest you’ll be charged on debt versus how much interest you’ll earn through saving.

If the interest you’ll be charged is greater than the interest you’ll earn, it’s likely to be a good idea to put as much money as you can towards repaying debt before building your savings.

It’s typically best to clear debt from short-term borrowing options like credit cards, store cards and overdrafts as quickly as you can. 

It’s also worth thinking about what funds you’d have available in case of an emergency. Ideally, you’d 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

Some debts don’t need to be repaid 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. 

If you don’t have anything specific to save for, you may want to build an emergency fund.

Once you have an emergency fund, consider what’s important to you. You may want to:

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. Often people speak about good debt and bad 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

Bad debt may 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

It’s important to keep in mind that 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 then you might not be charged any interest, depending on the types of transactions you make.

Or, if you have a mortgage that’s costing you too much and you’re struggling to meet other costs, it’s not necessarily ‘good debt’.

Explore: What to do if you fall behind on debt repayments