Asked whether to pay down debt or build savings, most people are told to do both, which is
accurate and not very helpful when capacity is limited. The decision is actually fairly
mechanical once two numbers are on the table.
Compare the rates, with one exception
The core comparison is between what the debt costs and what the savings earn. Money directed
at a balance charging a high rate produces a guaranteed return equal to that rate, which will
comfortably exceed what a deposit account pays. On pure arithmetic, expensive debt wins.
The exception comes first, though, and it is important: a small emergency buffer before
anything else. Without one, the next unplanned expense goes back onto credit, and the repayment
progress is undone by the same mechanism that created the balance. A buffer is not an alternative
to repayment; it is what makes repayment stick.
A workable order
In practice the sequence that suits most situations is: build a modest buffer covering one
cycle of essentials, then direct everything available at the highest-rate balance while paying
minimums elsewhere, then — once expensive debt is cleared — grow savings toward a fuller
emergency fund.
Two things modify this. If an employer matches retirement contributions, that match is an
immediate return that usually beats everything else, so capture it throughout. And if a debt is
at a genuinely low rate, the arithmetic narrows enough that paying it slowly while saving is
entirely reasonable.
