Spare money can go two places: into savings, or against a debt. The arithmetic half of the question is short. Compare what the savings earn with what the debt costs.
If a debt charges 18 percent and savings pay 3 percent, then $1,000 put against the debt is worth about $180 a year and the same $1,000 in savings is worth about $30. In that case the debt is the better use, by a distance.
When the two rates are close together the gap is small, and the decision stops being about arithmetic at all.
The other half is that a household with no savings and one debt usually borrows again the first time something breaks. A debt cleared with the only buffer there was tends to come back, with a fresh set of fees attached.
A debt cleared with your last buffer often just moves into next month.
The order most households arrive at, whatever the rates say: a small buffer first, then the expensive debt hard, then the rest of the saving. The buffer is what stops the plan from unwinding.
Two things change the answer. A debt with a charge for early repayment is worth less to overpay than its rate suggests. And money that somebody else adds to or matches is arithmetic of its own, worth understanding before any rates are compared.
Where the amounts are large, where a debt is secured against a home, or where a particular scheme is involved, the answer turns on details this piece cannot see. That is a question for a licensed professional who can look at the whole picture.
General information about how money works, not advice. What is right for you depends on your own situation, and a licensed professional can look at that with you.
Peeka carries this piece too, under Insights and Learn, with the examples in your own currency. Read it in the appGet the app
