PortioOpen appGuides · By the Portio team ·
Should you pay off debt or save first?
Do both, in this order: set aside one month of basic costs, then put everything you can toward debts that charge interest, then go back to building savings. The small cushion stops the next surprise from becoming new debt. After that, an expensive debt costs you more each month than savings can earn. See below how long your debt takes at your monthly payment.
- What you owe100%3,700
At 720 a month you are done in 6 months. A quarter more, 900 a month, takes 5 months.
Read the full guide
Why save anything while I still owe money?
Because without a cushion, the first repair or medical bill goes onto new debt. You lose the progress, and often the motivation with it.
One month of basic costs is enough to break that cycle. How to count it is in how big your emergency fund should be.
Which debts come before savings?
Debts that charge interest. Compare the two rates: what the debt costs you and what your savings earn. When the debt costs more, which is true of almost every credit card and store credit, paying it off is the better use of the money.
The payment matters as much as the rate. Take 3,700 owed at 20% a year:
| Monthly payment | Debt-free in | Interest paid |
|---|---|---|
| 150 | 33 months | 1,105.31 |
| 720 | 6 months | 201.71 |
Paid slowly, the same debt costs more than five times as much in interest.
What about money I owe to family or friends?
It usually has no interest, but it is not free. It costs trust, and the other person may need the money.
- Agree on an amount and a day, and treat it like a bill.
- Pay on payday, before your own spending.
- Say so early when a month will be short. A message before the date is worth more than an apology after it.
Because there is no interest, there is no reason to empty your savings for it. Keep your cushion and pay steadily.
Which debt do I pay first?
Pay the minimum on every debt, and put everything extra on one of them.
| Method | Order | Good for |
|---|---|---|
| Highest interest first | the most expensive debt | paying the least in total |
| Smallest balance first | the debt you can finish soonest | early wins that keep you going |
Both work. When there is no interest, start with the smallest, or with the person who needs the money most.
Here is 3,700 owed to three people, paid at 720 a month, smallest first:
| Month | First debt, 500 | Second, 1,200 | Third, 2,000 | Still owed |
|---|---|---|---|---|
| 1 | 500 | 220 | 2,980 | |
| 2 | 720 | 2,260 | ||
| 3 | 260 | 460 | 1,540 | |
| 4 | 720 | 820 | ||
| 5 | 720 | 100 | ||
| 6 | 100 | 0 |
One person is repaid in the first month, a second in the third, and everything is done in six.
How much of my money should go to debt?
Take it from what is left after giving and bills, and give debt the largest share until it is gone. In the example above, 720 is 40% of the 1,800 left from a salary of 3,000.
Keep two other lines alive, even small ones: savings, so the habit survives, and something you enjoy, so the plan does.
When the last debt is paid, move its share to savings the same month. You were already living without that money, so your savings rate jumps without your daily life changing.
What if I cannot keep up with the payments?
Speak to the company or person you owe before you miss a payment, not after. Most will agree to a smaller amount over a longer time. Many countries also have free, non-profit debt advice services that can negotiate for you.
Be careful with new debt taken to pay old debt. It helps only when it really costs less.