Is it better to pay off debt or save?

With a continued threat of a recession ahead for 2023, what can you do to protect your finances? Is it better to pay off debt or save for the future? 

Assessing your debts is a priority when a recession is on the horizon. You want to make sure you’re taking the right actions to manage any debt or knowing when you’re better off saving.   

Follow our flow chart then scroll down the blog to find what could be your right time to either pay off debts or start your savings.  

Do you have high-interest debt? (like credit cards and loans over 5% interest) 

• Yes - It might be best to pay this off debts with high interest rates such as credit cards and store cards first. It’s unlikely you will earn as much in interest on your savings as you are having to pay in interest on your debt. Paying off your most expensive debts first can help you reduce your total costs as you’re not letting the interest you owe grow over time.  An exception here is if you are locked into a debt with a penalty to pay back early. If so, drop down to ‘Are you locked into a debt with a payment penalty?’ 

• No? Next question...

Are you locked into a debt with a payment penalty?  

• Yes - If paying off your debt incurs a penalty, as with some loans or mortgages, then it could be best to leave the cash in a savings account until the penalty's small enough that you can pay it off early. 

• No? Next question...

Do you have debt with a low interest rate?  

• Yes - Debt with low interest, can make the answer to, ‘is it better to pay off debt or save?’, a little more blended.  If you have low or zero interest on your debt, such a 0% interest on credit cards or overdrafts, less than the amount your savings will earn after tax then you could profit more by saving and keeping these debts. You need to be disciplined financially so you can pay off the debt before any interest is added.
  If you choose to save, building an emergency fund is beneficial for most. Unforeseen costs are a reason debt can build in the first instance, so having cash in the bank (or an easy access savings account) can be a great way to take some of the stress out of unexpected, essential costs such as replacing a boiler or car repairs.  

• No? Next question...

Do you have a mortgage?  

• Yes - A mortgage is also a debt, and like all debts, the sooner you pay it off the more control and financial security you will have, including reducing monthly outgoings. Each individual circumstance is unique, so if you are in a position to overpay your mortgage, The Money Experts guide to overpaying your mortgage will give you a great starting point: 
  Before you plough all your cash into repaying a mortgage, remember that it’s a good idea to keep some money in an emergency fund, should the unexpected happen.  

• No? Then let's look at....  

How you can start saving 

Now you have the answer to when is it better to pay off debt or save, you could be ready to start saving. Here is how you can begin.  

1. Emergency fund  

It looks as if you could be ready to start saving. If you are keeping up with mortgage payments and paying of your credit card bill in full each month then you could benefit from saving.  Putting additional cash into a savings account, such as an easy access savings account, ideal for emergency fund.  It's generally worth having three to six months' worth of expenses put aside in savings in case of an emergency. An easy-access saving account is ideal for an emergency fund. 

2. Long term savings goal  

If you have a longer term fixed savings account such as a fixed term bond or fixed term ISA account, perfect if you have a longer terms savings goal such as planning for a wedding or saving for a deposit for a house.  

3. Budgeting is key 

Whether you are paying off debts or looking to save, it’s vital to have a plan that you can stick to. It will help you to consistently meet your goals and you may even be able to pay off debt quicker or save a little extra. You can find the right budget for you in our five most popular budgets blog and some useful ways to track income and outgoings with our best budgeting apps.  

For advice on how to manage debt or save, personalised to your individual, financial circumstances, speak with a professional financial advisor. Visit  unbiased.co.uk. for a list of regulated advisers. There’s usually a charge for getting advice.