Written by Ben Nash, a financial adviser and founder of Pivot Wealth, and the Author of the Amazon Best Selling Money Guide, Get Unstuck (released August 2018).

If you’ve got debt and are trying to save at the same time, it can be like trying to fill a leaky bucket, two steps forward and one back. It can feel like you’re spinning your wheels and not making any progress.

However, I think everyone understands that it’s important to have some savings you can draw on in the event of the unexpected.

But when you’ve got a bunch of debt and no savings, it can be hard to know whether you should focus on paying down your debt, building your savings, or try to do both at the same time.

So how do you figure out which is best for you?

The general rule

If you’re looking at the numbers, there’s a straightforward way to approach whether to pay down debt or save. You simply compare the interest rate you’d earn from saving money in a savings account against the interest rate on your debt. If the interest rate on your debt is higher than the interest rate on your savings account, you’ll be financially better off to pay down debt instead of saving. Conversely, if the interest rate on your savings account is higher than the debt interest rate, you’ll be financially better off saving.

#Protip: Interest earned on a savings account is generally considered taxable income, so you need to compare your debt interest rate to the after tax interest rate on your savings.

Most of the time, the interest rate charged on debt will be higher than the interest you earn on a savings account. This means that in the majority of cases, by looking purely at the numbers, you’re more likely to be financially better off by paying down debt before you start building your savings.

But numbers aren’t everything. In some cases, although it may not be the very best financial decision, holding on to some extra cash may be the best option for you.

The exception

According to the Stress and Wellbeing Report from the Australian Psychological Society, money is the leading cause of stress in Australia. Having a bunch of debt with no savings in the bank can be stressful, because you’re worried you might be caught short if the unexpected happens.

From the work I’ve done with my clients, I’ve found having a solid emergency fund in place can go a long way to increasing your peace of mind and reducing financial stress. As such, although saving while you have debt may not be the best financial decision when looking only at the numbers (as discussed above), it may help to reduce money related stress and provide peace of mind. When you have high personal debt, from the work I’ve done with my clients, I’ve seen that a common strategy is to direct every spare dollar of your income to pay down your debt. But if you follow this approach, you can run into trouble if you get caught short with unexpected costs during your pay cycle and don’t have any savings to put aside to cover them. The only option then is to put the spending onto credit, continuing the debt cycle.

One of the best ways to pay down debt faster is to cut the debt cycle, stop using your card, create a solid budget, and focus on paying down debt with an amount you can afford each month while still covering your other spending. 

But if you follow this approach it means that unless you put something aside you won’t have access to any cash to cover unexpected expenses. In this case, holding some money in savings can give your peace of mind a big boost. Even though it’s not the best option from a purely financial perspective, it might be the right move for you.

How much is enough?

In my view, having at least a small amount of savings is important for your peace of mind and to cover emergencies. But, I commonly see people that are running their savings balance at around $5k-$10k with a similar (or higher) amount of personal debt. I think if you’ve got savings and debt around these levels, you should seriously look at the numbers and calculate how much you’re behind as a result of running such a high amount of personal debt and savings at the same time.

If your personal debt interest rates are anywhere close to the average credit card interest rate (reported by info choice at 19.75%), consider using some of your savings to pay down your debt. You can still hold onto some of your savings for the unexpected. But, paying down a chunk of your debt will reduce the interest you pay and free up your spare cashflow for either paying down the rest of your debt, or building your savings faster.

But first...

These days, the market for all financial products is extremely competitive. This includes credit cards, personal loans, and mortgages. This means that by doing a product comparison online, most of the time you can get a better deal and reduce the interest rate you’re paying on your debt.

Before you jump into setting a savings vs debt repayment strategy, make sure you’re getting a good deal on your debt. This can reduce your interest rate while allowing you to both pay down your debt and start building your savings sooner and more rapidly.

If you have credit card debt, look at doing a credit card balance transfer to reduce to a low or 0% interest rate. If you can reduce your interest rate to 0%, it can mean that you’re not worse off by putting some savings aside while you’re still paying down your debt. This could allow you to start building your emergency fund, increase your peace of mind, and reduce money related stress at the same time.

If you have personal debt and can’t do a balance transfer right now, look at using a debt repayment strategy like cascading debt repayments to pay down your debt faster.

The wrap

Trying to get ahead while you’re running debt can be challenging. Debt repayments often drain your spare cash and slow down your progress in getting ahead, so it’s a generally a smart financial move to pay down debt as quickly as you can. But having some savings is also important for peace of mind and to cover the unexpected.

The right balance between paying down debt and saving is different for everyone, but finding this balance is important. Take the time to get clear on your debt repayment vs. savings strategy, and you’ll likely get financial and peace of mind benefits, and be more likely to follow through and ditch your debt for good.

GetCreditScore offers a range of debt consolidation products that may help you, such as personal loans to help you to consolidate debts. Have a look for yourself and see.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.