Learn → Saving

Should I save or pay off debt first?

Usually both, in a specific order: build one small emergency fund first, then attack high-interest debt hard, then build the fund properly. Without any buffer, the next unexpected cost goes straight back onto the card and undoes the progress. The buffer is not competing with the debt — it is what stops the debt regrowing.

The arithmetic answer, and why it is incomplete

On paper this is straightforward. Debt costing 22% a year and savings paying 3% are not a close contest — every unit of currency sent to savings instead of the debt costs you the difference. Pure arithmetic says clear the expensive debt first, entirely, before saving anything.

The arithmetic is correct. It is also, on its own, the reason a lot of people cycle through the same debt three times.

What the arithmetic leaves out

If you have no buffer at all, you have no way to absorb an unexpected cost except more borrowing. So the pattern runs: pay the card down over eight disciplined months, then the car needs work, and the repair goes onto the card. You are back where you started, minus eight months, plus the specific demoralisation of watching it happen.

The buffer is not an alternative use of the money. It is the thing that makes the repayment stick. Without it, you are not choosing between saving and repaying — you are choosing between repaying once and repaying repeatedly.

The order that works

1. A small buffer. One month of essential spending, or a fixed modest amount if that feels far away. Fast, deliberately small. This is not your emergency fund; it is a shock absorber so that ordinary life does not become new debt.

2. High-interest debt, hard. Everything you can spare, aimed at the most expensive balance. This is the phase where the arithmetic rules and speed genuinely matters, because the cost compounds against you daily. Keep the buffer intact while you do it — and if you have to use it, pause repayment, rebuild the buffer, resume.

3. The emergency fund properly. Three months or more of essential spending, now that nothing is quietly costing you 20%.

4. Everything else. Investing, longer-term goals.

What counts as “high-interest”

There is no universal threshold, and it moves with prevailing rates. A workable test: compare the interest rate on the debt against what you could reasonably expect from investing over a long period, and be pessimistic about the investment.

Credit cards, overdrafts, store cards, payday lending and most short-term consumer credit sit clearly above that line. Clear them fast.

A long-term mortgage at a modest rate usually sits below it, and does not deserve the same urgency — paying it down early is a legitimate choice, but it is a preference for certainty, not an obvious win.

Between those, judge case by case. The rate is the fact that matters, not the label on the product.

One exception worth knowing

If your employer adds money to a retirement account when you contribute, contributing enough to receive that addition usually beats repaying almost any debt. An immediate, guaranteed uplift on the money you put in is a return no consumer debt rate exceeds. Take that, then go back to the order above.

The part that is not arithmetic

Some people repay a small balance first, out of order, because finishing something visible keeps them going. Strictly, that costs money. In practice, a plan you continue beats a marginally cheaper plan you abandon in month four.

If you know that about yourself, build around it rather than pretending otherwise. The interest difference on a small balance is usually modest. The difference between continuing and quitting is not.