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Repay debt or save – which is best?

Repay debt or save. Which one is best? It can be a real conundrum and one that many wrestle with.

Being in debt feels uncomfortable, whilst having savings gives us confidence and reassurance. But which should you do first? Or is it both at the same time?

Well, the answer is a combination of both and in this article, we’ll go into why and how best to approach it.

When deciding whether to first repay debt or save, the answer is that overall it is a combination of both.

Long term, we want a good level of savings to protect us. This is known as an Emergency Fund. But if we did that before clearing debt, it would cost us more and take a lot longer.

So, clearing debt before having large savings make sense.

BUT, unless we have a cushion of at least some savings, we can end up going further into debt.

So, before we repay that debt, let’s talk about the mini-Emergency Fund.

Build a mini-emergency fund before repaying debt

An Emergency Fund is a separate pot of money that can be used when it all goes a bit wrong. For example, this may be a car repair or replacing the boiler.

When things like this hapen, having this fund stops you going (further) into debt.

In a worst-case scenario, an emergency fund would cover the temporary loss of employment. For this reason, a general rule of thumb for a fully funded Emergency Fund is around six to nine month’s living expenses.

However, there is little point saving up such a large amount of money when you have accruing debt.

So when thinking about whether to repay debt or save, here’s an example of why saving a large Emergency Fund needs to be held off until after you repay your debt.

Example: £5,000 savings vs £5,000 credit card debt:

£5,000 Debt Savings
Interest rate 15% 1.5%
Cost / Income per year -£750 +£75

As you can see, leaving your debt as it is would put you in a much worse position than attacking your debt.

The mini-emergency fund

That said, it’s important to have some form of savings. Otherwise, unexpected expenses will likely be put onto credit cards. As a result, you can get further in debt and sabotaging any progress you’ve already made.

For that reason, before paying off debt, firstly make sure you are covering the minimum payments. Next, take any surplus you can and build yourself a Mini Emergency Fund of £1,000.

OK, this won’t help in the long term if you lose your job, but it will cover the majority of emergencies.

You’ll also feel a greater degree of confidence and certainly sleep better having that financial buffer.

For more Money Mindset hacks, check out
How to Control Your Ego and Create Wealth 

Planning to repay debt

Once we’ve committed to taking positive action from the previous session, we need a plan to repay the debt.

And to do that, we need a realistic assessment of where you are.

This is the part where you are going to have to do some work. So get ready to dig through some paperwork and make some calls. Remember though, once it’s done, it’s done and you can move forward. What’s critical here is that we take action, now. We’re with you every step of the way.

Right, let’s get cracking.

If you’ve got yourself the East Sleep Money Financial Fitness Guide, you can refer to the included ESM worksheets. Just head to tab 4 for your template to make things nice and easy.

If not, open up a spreadsheet (Google Sheets are free!) or even a pen and pad.

The benefit of a spreadsheet is that once you have filled it in, you can continue to update it as you go and visualise your financial success.

Spreadhsheet detail each debt

To help repay debt, you can even buy a ‘debt visualisation chart’, though cheaper to create your own. The one we used, the ‘Debt Destroyer’ (below) is in the Financial Fitness Guide. This is a really powerful tool that helps you monitor and visualise your progress, which is hugely motivating.

Table showing the progress of paying off debt

What you need to know when preparing to pay off debt

The debts we are referring to in this exercise are those that have high-interest rates, as these do the real damage:

This type of bad debt includes:

  • Credit Cards
  • Store Cards
  • Personal Loans
  • Overdrafts
  • Loans From Friends and Family (they still count)

At this point, we are not worried about mortgage or student loan debt as these are usually far lower rates of interest.

Bad debt - know your enemy

Credit card debt that cannot be paid off in the same month it is incurred is bad. Personal loans are fundamentally bad too. That is because your finances are now intertwined with a financial institution and you are committed to typically high-interest rates. If you lose your job or run into financial difficulty, you still have to pay this debt.

If you don’t pay off your debt fully then you get charged interest. This means you are paying more for everything you put on your credit card. Yes, there are some 0% cards out there, but these are there for a reason.

Most banks know you won’t pay off your credit card before these special rates run out. Banks are businesses. They need to make money. They don’t give you money because they want the world to be a better place. They want to make money from YOU by having expensive debt for a long time! Don’t let them.


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Quickly find your outstanding debt

Finding out your outstanding debt can be a challenge. Digging through lots of paperwork is definitely not fun.

The good news, though, is that we have a nifty shortcut. There is a FREE app that can help called ClearScore.

All you need to do is download the app, register your details and then look through your credit report (found in Report -> Accounts). Your report will show you a list of all your outstanding credit card and loan balances (it can sometimes be a few weeks behind). Also, the balance outstanding on your mortgage is shown, so you can work out the equity in your home.

What do you owe?

Next, we need to see exactly what we’re dealing with here. In addition to knowing what we owe and to who, we also need to understand what the interest rate is and what the monthly repayments are.

Document the following details for each debt you have.

  • Debt name
  • Amount outstanding
  • Monthly repayment
  • Interest rate

Remember, accuracy is key here. Don’t guess the amounts. Spend a bit of time logging into accounts, digging out paperwork or making calls.

Again, documenting this information in a spreadsheet is ideal because we can then sort and arrange the data based on different variables. This could be by the highest interest, the largest balance or the most expensive monthly repayment.

Below is a sample of the Worksheets included within the Financial Fitness Guide which do some of the work for you.

Spreadhsheet detail each debt

These are crucial details to know before the next steps. They are going to allow us to work out how we organise your debt repayment depending on which strategy is right for you.

Save. Debt. Save

By the end of this session, we now know whether to repay debt or save:

  • Save a mini-emergency fund of £1,000
  • Repay debt
  • Save a fully-funded emergency fund of three-six month’s living expenses.

We also know that in order to work out a debt repayment plan, we first need to know our true debt position.

The next question, is what is the quickest way to repay debt?


You’ve taken action and are now ready for the next session. Click on the image below for the next workout: what is the quickest way to destroy your debt?

Excited? Great! See you there!


NEXT - Clear

What is the quickest way to clear your debt? does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. Investments may go up as well as down and you may get back less than you put in.