Do I pay off debt first, save first, or do both?

The big question! Should you prioritise clearing your debt, saving, or doing a bit of both? 

It’s important to look at practicality here, but also the psychology behind the strategy that you choose. For example, paying off your debts might feel like a marathon, but the buzz that you get from having some money saved might feel like a quick win. Let’s take a look at each option and the considerations you should make. 

Option 1- Pay off debt first

Start with getting the basics right- pay off minimum payments. Then think about if you can overpay, and how you want to do it. You could either make overpayments to pay them off in order of smallest to largest (another psychological win!) or in order of highest interest to lowest interest (the more practical option). 

Paying off your debts before you start to save anything gives you the benefit of paying less interest over time, and of course increases your net worth. However, if you have precisely £0 in savings, this may leave you vulnerable to unexpected costs and reliant on credit again. It’s prudent to have a little bit of cash tucked away for emergencies, even if that means paying off debt happens more slowly.

Option 2- Save first

When you focus on saving over paying off your debts, you might feel good about making progress towards your goals. With interest rates at a high, you might wish to prioritise paying off your debts so that you are not paying more interest than you have to. But by the same token, higher interest rates also mean a higher return on your savings.

It’s a good idea to consider putting together an emergency fund. Your emergency fund is a separate amount of money that is a fallback for when unexpected costs arise. It’s often said that this should cover 3-6 months’ worth of essential expenses, but if you’re also managing other bills and debts you might want to start with a goal of £1,000. 

Option 3- Side by side

When you tackle debt pay off and saving, you can make progress towards your goals at the same time. Although it will dilute your progress in either direction, it can feel motivating to see the needle moving in both directions. 

What’s key to remember is that you can change your mind. If you start with paying off debt and saving at the same time, and then decide to switch to focusing on your debts? That’s totally ok! Circumstances change all the time, and you might find that once you’ve paid off your overdraft, you actually want to save for something in the short term. Equally, you might save up a chunk of money, and then decide to pay off your loan with that cash. 

There is no ‘right way,’ just the right way for you. That’s why we always say it’s called personal finance for a reason - it’s personal to you!