Should I Pay Off Debt or Save? Here’s the Formula (UK GUIDE)

 💡 The Big Question

You’ve got a bit of cash — maybe £500, maybe £5,000 — and you’re wondering:

👉 Should I stick it in savings, or kill off my debt?

The boring answer is “it depends.”

The fierce answer is: do the maths and stop guessing.

📊 The Formula

Here’s the simple rule:

If the interest rate on your debt is higher than the interest rate on your savings → pay off the debt.

Formula

Net Gain/Loss = Savings Interest % – Debt Interest %

Example:

• Credit card APR = 20%
• Savings account = 5%
• 20 – 5 = 15% loss → your debt is eating your money alive.

⚖️ Example Scenarios

Scenario 1: You’ve Got £1,000 and a Credit Card at 20% APR

• If you keep the £1,000 in savings at 5% → you earn £50 a year.
• If you use it to pay down debt → you save £200 in interest.
  👉 Winner = pay off debt.

Scenario 2: You’ve Got £5,000, Debt at 6% APR, and a Savings Account at 5%

• If you save → you earn £250 a year.
• If you pay debt → you save £300 a year.
  👉 Pretty close. In this case, do half-and-half (emergency fund + debt).

Scenario 3: No Debt, Just Wondering if Saving Is Enough

Answer: Yes, but only with a plan. Build at least 3–6 months of expenses first, then start investing.

🛡️ Emergency Fund First Rule

Even if your debt is screaming at you, don’t throw every single penny at it.

Always keep at least £500–£1,000 in easy-access savings.

👉 Why? Because if the car breaks down and you’ve got no buffer, you’ll end up slapping it back on the credit card = hamster wheel.

🎯 Step-by-Step Plan

1. Build a mini emergency fund (£500–£1,000).
2. Compare interest rates → use the formula.
3. If debt APR > savings APY → pay down debt aggressively.
4. Once high-interest debt is gone, shift to building long-term savings (ISA, investments).

📊 Quick Reference Table

Debt APR	Savings Rate	Best Move
20%	5%	Pay off debt ASAP
10%	3%	Pay off debt
6%	5%	Mix: savings + debt pay
3%	5%	Build savings first

Should I pay off debt or save first?

Use this formula:

Net Gain = Savings Rate – Debt Interest Rate

If debt interest is higher (e.g. 20% credit card vs. 5% savings), paying debt is smarter.

Always keep a small emergency fund before throwing cash at debt.