Money Goals

Should you pay off debt or save?

May 24, 2023

One of the biggest questions you have to ask yourself when building your budget is: “Should I save or pay off debt?”. Is it better to pay off debt or save for a rainy day? The answer can vary depending on your individual finances. Loqbox breaks down what you should think about when deciding between paying off debts vs saving your money. 

If you’re in the position when you’re wondering whether you should pay debt or save, it’s likely that you’re creating a budget for your finances. If not, you should definitely start there. Understanding your finances is a big step in knowing whether you should pay off debt or save. Loqbox has some examples of super simple and helpful budgeting rules here. 

Is it better to pay off debt or save?

Pay off your debts! In fact, it may even be better to use your savings to pay off your debts. You might be wondering why. After all, the point of budgeting is to improve your financial stability and plan for the future, right? Well, yes. But you also need your money to work as hard as it can for you, and debts can be a huge drain on your finances.

Why? Because basically, the interest you pay on your debts will usually be far higher than the interest you can earn on your savings. Imagine you have debt of £1,000 with 30% (£300) interest per year. Now imagine your savings of £1,000 earn 3% (£30) interest across the same period. If you paid off your debt with those savings, you’d actually be £270 up. 

So, this is why, in the battle between paying down debt vs saving your money, we say pay off your debts first. Once you’ve cleared them, your saving power gets a big boost! However, there are exceptions: firstly, some debts penalise you for paying off early. In that case you need to work out if the fees can be justified against the savings. 

Secondly, some debts have very low interest rates and some credit cards offer interest-free periods. If you find that the interest you’ll pay on a debt is lower than the amount you’ll make on your savings in the same timeframe, maybe consider holding off, at least until those circumstances change.

Should I save or pay off my mortgage?

Whether it is better to save or pay off mortgages really depends on your financial situation. Of course, paying off your mortgage as soon as possible and owning your home outright is a worthwhile financial goal. Getting rid of mortgage payments is a big weight off your financial shoulders every month. 

But paying off a mortgage often requires a lot of money. If you can afford to cover the remaining balance on your mortgage, you should weigh the benefits of having a debt-free home against the potential return on investment from saving or investing your money elsewhere. Ultimately, it depends on your financial priorities and goals.

The benefit of paying off your mortgage early is that you can save yourself thousands in long-term interest payments. Of course, most of us can’t afford to clear a mortgage in one go! But there are still options. It’s possible to overpay your mortgage every month.

Paying off chunks of your mortgage when interest rates are low, for example, protects you against future rate rises. But early repayment of mortgages not only saves you money in the long term, it also reduces what lenders get back. So check the terms of your mortgage for overpayment fees. Most providers let you overpay 10% monthly without penalty.

Growing an emergency fund vs paying off debt

When it comes to paying off debt vs saving for an emergency fund, both are essential. But, there are a couple of considerations. If you don't have an emergency fund, maybe build one before aggressively paying off debts. Ideally, you want to have three to six months of living costs saved to cover unexpected expenses or unemployment. 

Once you have an emergency fund, you can then start chipping away at your debts. Prioritise paying off high-interest debts like credit cards or payday loans because they can quickly snowball out of control and take a considerable chunk of your income. Once those have been dealt with you can balance your savings and your debt repayments more easily.

Debt vs savings calculator

If you are still unsure whether to pay off debt or save, try using our Debt Payment Planner. This tool can help you to create a debt avalanche repayment plan and compare the potential outcomes of different scenarios based on your individual circumstance. 


The debt avalanche approach to repayment involves focusing on your debts with the highest interest rates first. By tackling the biggest part of the problem first, you then open the floodgates to mop up any less expensive debts you hold afterwards.

Deciding whether it's better to pay off debt or save depends on you and your unique financial situation. You need to consider things like interest rates, investment opportunities, and your monthly payments. However, one thing is for sure - it's always better to have a plan and take action towards your financial goals.

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