Savings vs Debt
Whether spare money should go to savings or to debt, decided by the two rates.
Recent
Formula
How the calculation works
The decision is made by the two rates, not the two balances. A debt at 20% is a guaranteed 20% return on every unit repaid, and no savings account pays that, so clearing it first is the higher return with certainty.
On 5,000 of debt the spread over a 4% savings rate is 16 points, which is 800 a year. That figure is the whole value of getting the order right, and it grows with the balance and the gap between the rates.
Common mistakes
- Saving at 4% while carrying a card at 20%. The two are certain and the arithmetic only goes one way, yet the round numbers of a savings balance feel like progress.
- Clearing every last unit of debt before starting any savings. Without an emergency fund the next surprise goes back on the card, which undoes the work.
When to use it
- Use it when spare money arrives and you are deciding between the savings account and the card, so the choice is made on the rates.
- It is also the check on a debt-consolidation offer: compare the new rate with the savings rate and see whether consolidating beats simply overpaying.
Worked example
On 5,000 of debt at 20% against savings at 4%, clearing the debt wins and is worth 800 a year.
Common questions
Should I stop saving entirely?
No. An emergency fund comes first, or the next surprise pushes you back onto the card. Once that is in place, extra money does most good on the highest-rate debt.
What if the debt interest is tax-deductible?
Then the debt costs less than its headline rate, so compare using the after-tax rate before deciding.
Related tools
-
Simple Interest
Interest that is charged on the principal alone and never compounds.
-
Compound Interest
See how fast money grows when the interest earns interest too.
-
Savings Goal
How many months of saving it takes to reach a target.
-
Regular Savings Growth
What regular monthly deposits become after a few years, and how much of it is interest.
-
Investment Return Calculator
Total gain on an investment, and what it works out to per year.
-
Inflation Adjusted Value
What a sum is really worth after inflation, and what today's spending will cost later.