If you have spare money each month and also owe money on a credit card or loan, it's a genuinely common dilemma: build a safety net first, or throw everything at the debt? The honest answer is "usually a bit of both" — but the interest rate on your debt is what should decide the balance.
Why the interest rate is the deciding factor
An emergency fund sitting in savings might earn you a modest rate of interest. A credit card charging a high APR is costing you far more than that every month it carries a balance. Mathematically, overpaying high-interest debt is usually the better use of spare money — it's a guaranteed "return" equal to the interest rate you stop paying, which most savings accounts can't match.
But pure maths isn't the whole picture. If you have absolutely no savings and an emergency forces you to borrow again — often on the same expensive card — you can undo your progress and end up back where you started, or worse.
A practical middle path
- Step 1: Build a starter fund of £250–£1,000. Enough to cover most small emergencies without reaching for a credit card.
- Step 2: Attack high-interest debt aggressively. Put most of your spare income toward the highest-rate debt while making minimum payments on everything else.
- Step 3: Once high-interest debt is cleared, build the fund up properly. Move on to a fuller three-to-six-month buffer.
- Step 4: Lower-interest debt (like some student loans or low-rate mortgages) can often wait. These are less urgent than high-cost borrowing.
How to prioritise between multiple debts
| Method | How it works | Best for |
|---|---|---|
| Avalanche | Pay minimums on everything, put extra toward the highest interest rate debt first | Minimising total interest paid — mathematically optimal |
| Snowball | Pay minimums on everything, put extra toward the smallest balance first | People who need quick wins to stay motivated |
A worked example
Someone has £150 spare each month, a credit card charging a high APR with a £2,000 balance, and no savings. A sensible order: spend the first couple of months building a £300 starter fund (about £150/month), then redirect that £150 fully to the credit card once the starter fund is in place. This avoids the trap of throwing every spare pound at debt only to reach for that same card the moment the car needs a repair.
Common mistakes
- Building a large emergency fund in low-interest savings while carrying high-interest debt the whole time — this usually costs more in interest than it earns in safety
- Going the opposite way — paying off all debt with zero savings buffer — then re-borrowing at the first unexpected cost
- Not distinguishing between high-interest debt (credit cards, payday loans) and genuinely low-interest debt, and treating them with the same urgency
- Ignoring free debt advice when debts feel unmanageable, rather than trying to figure it out alone
What to do next
List your debts with their interest rates, set a small starter emergency fund target, and once that's in place, direct spare money toward the highest-rate debt first. Revisit the balance between saving and repaying every few months as your situation changes.