In purely financial terms, deciding whether to pay off a debt, or to start saving regularly, is clear cut:
If you're paying more interest on your loan or debt than you're earning on your savings, it makes sense to pay off the debt first.
For example, if you have savings in an account earning 2% interest, and you have store card debt that you're paying 19% interest on, it makes more sense to pay off the store card debt first, and then start adding money to your savings account.
However, this isn’t a rule that applies to every situation. For example, mortgages, and certain loans, have fixed repayment terms that are not negotiable. If possible, you should try and build up savings in addition to making those payments.
There are 3 key things to consider:
If you have high interest debt, such as payday loans and store cards, these should usually be your number one priority. If you have several debts, it's typically best to prioritise the ones charging the highest interest rates first. If you owe money on several credit cards, you could also consider a balance transfer to simplify things and save money.
It may be sensible to build up an emergency savings fund, to cover unexpected costs, before focusing on paying down other debt.
Early repayments and break fees
Certain types of borrowing come with penalties or fees if you pay them back early. You should check the terms of any borrowing carefully before opting for an early repayment. Then do your calculations to see how much it could cost or save you.
With this strategy you could tackle high interest debt first, like store cards and payday loans. Then you could make a plan to pay off lower-interest, longer-term debts while you:
build an emergency savings fund to meet unexpected costs like home repairs or losing your job
get into a savings habit by putting a regular amount each month into a savings account
plan longer term savings to meet your financial goals
We've got even more tips on how to build up your savings.
Check out some of our savings accounts and see if there's one that's right for you.
It’s a good idea to have a number of different types of savings. Learn what options you have for different goals.
Instilling good saving habits can help you met the financial goals you have outlined for yourself and your future.