Should you save or pay off your debts first?

Let’s look at why getting into a savings habit is good for your financial health, and how to decide whether to prioritise saving or paying off debts. 

Saving money can help you become financially secure and support you and your loved ones in good times and bad. Saving can help you: 

• Deal with unexpected costs and emergencies
• Reach your short, medium and long-term financial goals, like saving for a car, a wedding, a house deposit, or your retirement

Saving money is also good for your health. Studies throughout the world suggest that people who save for their future feel more positive, sleep better and experience better mental wellbeing than those with no savings.

It may feel like a challenge to start saving money, but there are small things almost anyone can do to save a little money each month, such as:

• Planning meals and cooking in batches to save on food shopping
• Shopping around and comparing prices to reduce your bills
• Turning down the air conditioning a couple of degrees

Do you have any debt? Many people do, and the key to having debt is knowing how to manage it – especially high-interest debt.

In most situations, if you’re paying more interest on your personal finance 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 a credit card that you're paying 19% interest on, it may be sensible to pay off the credit card debt first. You’ll save on the higher interest charges.

This rule doesn’t apply to every situation. 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. 

Here are 3 key things to consider:

• Interest rate – If you have high-interest debt, such as personal loans and credit 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.
• Unexpected costs – It may be sensible to build up an emergency savings fund, to cover unexpected costs like home repairs or losing your job, before focusing on paying down other debt.
• Early repayments and break fees – Certain loans and borrowing come with penalties or fees if you pay them back early. Check the terms of any borrowing carefully before opting for an early repayment.

A blended approach could make sense. Referring to the example above, you might:

• Tackle high-interest debt first
• Build an emergency savings fund next
• Get into a savings habit by putting away a regular amount each month
• Make a plan to pay off lower-interest, longer-term debts
• Plan longer-term savings to meet your financial goals