Save or pay off debt first? The answer has a number in it
It is the most common question and the worst answered, because almost everyone replies with an opinion and it has arithmetic.
In short
The order that works almost always: a minimum cushion of one month of costs first, then high-interest debt until it is gone, then the rest of the cushion. The reason is mechanical rather than mathematical: with no cushion, the next surprise goes back on the card and the debt you were paying down grows behind you. Above roughly 20% a year, the debt outranks any saving except that minimum.
The purely mathematical version of this question is easy: pay off first whatever charges more than you can earn by saving. The trouble is that this answer loses many people money, because it describes a life without surprises.
Why the purely mathematical answer fails
Suppose you follow it to the letter: every spare unit goes to the card, nothing to savings, because the card charges far more than any account pays.
Two months later the fridge breaks. There is no cushion, so the fridge goes on the card. You have been paying down debt for two months and your debt is the same or larger — and now you also feel defeated, which is the part that makes people abandon the plan.
The minimum cushion does not compete with paying down debt. It is what makes paying down debt work.
1 month of costs
The minimum that comes first
It stops the next surprise going back on the card
Over 20% a year
Debt that outranks saving
No safe saving comes close to that
Under 10% a year
Debt that can coexist with saving
Here doing both at once genuinely makes sense
The order, with numbers
- One month of costs set aside. Not three, not six: one. It is quick to reach and it is the one that breaks the cycle.
- The expensive debt, to the end. All the surplus to whichever charges most, minimums on the rest. The method and the two possible routes are in how to get out of debt.
- The rest of the cushion. Now up to three months, or six if your income is irregular.
- Everything else. Once there is no expensive debt and there is a cushion, a different conversation starts.
Where the line sits
What decides is the real annual rate on the debt, fees included.
Above 20% there is no debate: there is nowhere safe to keep money that comes close, so every month the debt stays alive costs more than any saving produces.
Below 10% both directions become reasonable, and something that is not a number enters: sleeping well. Some people do better with the debt gone even when the arithmetic says otherwise, and that preference is legitimate data, not a weakness.
Interest-free instalments are a separate thing
They do not enter this calculation, because they charge no interest: paying them early saves nothing. What does need doing is counting them, because four running at once commit next month without costing a unit extra. That is in interest-free instalments.
How to know where you stand
One piece of information is needed and almost nobody has it to hand: the total of everything you owe, with each debt's interest rate beside it. Not the monthly payment, which is what banks show, but the balance and the rate.
With that list in front of you the order decides itself, and it is usually different from the one people were following on instinct.
Common questions
- How much cushion do I need before attacking the debt?
- One month of costs, not of income. It is enough that an ordinary surprise does not go back on the card, and small enough to reach quickly and move on to the debt.
- What if I have several debts at once?
- Minimums on all of them and the whole surplus to one. Which one: the highest rate if you want to pay less in total, the smallest balance if you need to see a result soon. The second is not irrational — a plan abandoned in month three saves nothing.
- Should I stop saving entirely while paying off debt?
- Only if the debt is expensive and you already have the one-month cushion. With debts under 10% a year, doing both at once is perfectly reasonable and far more sustainable.
Try it on your own money
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