To Save or to Pay Off Your Debts: That Is the Question


There’s no doubt that you should save money and pay off your debts. Both are challenging, but you need to do both. If you’re trying to decide where you should first allocate your funds, this blog is for you.

Household debt continues to soar, reaching an increase of 200% in the last 40 years, as confirmed by the Reserve Bank of Australia. It’s estimated that an average Australian earning $80,000 typically spends $169,000 each year. As of 2016, mortgages are the main reason for the high debts. On the other hand, personal loans contribute to a little over 3% of household debt in the country. These loans are commonly used to purchase new (or used) cars and other goods, as well as for holiday trips. Other reasons for the massive debt in Australia are investments, student loans, and credit cards.

Meanwhile, savings differ depending on the age of the individual. Research cited in this news article said that Australians have about $28,400+ saved on average. You probably know about the 50/30/20 rule, which suggests that:

  • 50% of your income should go to essentials, including food, rent, and other vital bills
  • 30% should go to non-essentials, such as eating out, stress-relieving getaways on the weekend, and entertainment subscriptions
  • 20% should go to your savings account

But with all these pieces of information in mind, which one should you prioritise? Should your money go to your savings or your debts?

Here’s the straightforward answer.

You should always start with your loans. Most people pay more for their debts or borrowed money than the funds that go to their savings. If this is your case, it makes sense that you get rid of your loans first.

But then again, it’s not always simple because you still have to make sure that you have access to money in case of an emergency.

So, the simple trick here is to have at least three months’ worth of savings and then proceed to repay any loan you may have. You’re probably wondering now how much should your three months’ worth of savings be? Some people may tell you to calculate your expenses each month and make sure that you have enough for both essential and non-essential purchases. Then, keep 20% of your salary.

Your goal should be to have at least three or ideally six months of your monthly income safely stored in your savings account. Therefore, if you earn $96,000 yearly, you should have $24,000 to $48,000 as your savings. It’s always critical that you have money to pay for unexpected expenses.

However, there are exceptions to this rule. And the most prominent has something to do with your debt. Let’s say that you have a personal loan. If you delay any payments, you will likely incur high penalties, which only means you’re accumulating more debt.

australian money

When to Save Money

Once you have cleared your debts, you will have extra money. It will become easier for you to save some funds. Removing debt will also allow you to save quicker. If you have more than one debt, you should pay off the most expensive loan first. Look at the interest rate and make sure that you check the terms and conditions of the loan. Some have a late payment or early repayment charge. These fees help you decide which ones to pick to pay first. Some of the most expensive debts that you should prioritise are:

  • Credit card debts
  • Overdrafts, particularly unauthorised ones
  • Catalogue merchant services
  • Door to door sales
  • Payday loans

Many Australians, however, have a ton of debt, which could mean they have to wait several years to save enough money. In general, you do not need to fully pay off your loans or debts as long as you meet the following requirements:

  • You are able to pay for your mortgage payments with no delays
  • You make sure to pay your credit card bills every month on time
  • Your other loans do not cost you more because they have attractive interest rates, allowing you to save some money

If you do not have other loans or other commitments, you can start getting into the savings habit.

couple look at their debt

How Do You Save Money?

Savings account balances differ significantly from one individual to the next. Usually, the amount will depend on your earnings versus your regular financial obligations. The general rule is to have three to six months of your income or at least your expenses. If you still have debts and you use the 50/30/20 method, you will have to add your owed amounts in the 50% group.

For example, if you receive $3,000 each month, you can save $600. The remaining $2,400 will go to your essentials, including your debts and non-essential expenses. As your income increases, so should your monthly savings. If you do get a pay increase, giving you $5,000 each month, you should be able to save $1,000.

Of course, you should not rely on this calculation since your situation will likely be different. Be sure to tweak the amounts given above until you find the best one that works for you. It’s even possible that you can save more than 20% of your monthly income! 

Reducing your spending, increasing your income, and opening a dedicated savings account with competitive interest can help you boost your savings. Track your expenses and debts, too. For example, you can use apps to remind you when it’s time to pay off loans. That way, you never miss a due date, and you don’t have to worry about additional charges.

If you’re looking for personal loans with attractive rates and terms, check out our offers here on our website.