Deciding whether to save, invest or repay debt is one of the most common financial dilemmas people face, and there is rarely a single correct answer. A group of financial planners and coaches has set out a framework for thinking through these competing priorities, starting with the basics and building upwards.
Start with an emergency fund before you save, invest or repay debt
Philly Ponniah, financial coach at Philly Financial, calls it a ‘peace of mind fund’: a pot of accessible cash you can reach immediately when something goes wrong. Debt charities report that many clients in problem debt arrived there because an unforeseen cost (a burst pipe, a sudden bill increase) left them with no alternative but to borrow at a high rate, trapping them in a cycle of unaffordable repayments.
‘Cash isn’t there to deliver maximum investment growth, it’s there to give you psychological safety and real choices so you never have to make decisions out of panic,’ Ponniah says. Getting this buffer in place before focusing on anything else is the consistent advice from across the profession.
Clear high-interest debt, then look at pensions and mortgages
Once an emergency fund is in place, unsecured debts (credit cards, overdrafts and bank loans) should take priority over investing or overpaying a mortgage. The interest rates attached to these products are almost always higher than any return you could reasonably expect elsewhere. Ponniah notes that credit cards can charge 26 per cent interest, sometimes without borrowers realising. Left unaddressed, that compounds quickly.
Workplace pensions are the next consideration, and here the argument is straightforward. Once you earn more than £10,000 with an employer, you are automatically enrolled into a workplace pension scheme. Your employer must contribute at least three per cent of your earnings if you put in at least five per cent. Opting out saves you the five per cent but forfeits the employer contribution, money Maike Currie, Vice President of Personal Finance at PensionBee, describes simply as ‘free money’.
The tax relief attached to pensions makes them even more attractive. ‘A basic-rate taxpayer can put £80 into a pension and have it grossed up to £100 through tax relief,’ Currie explains. Few other savings vehicles offer that kind of immediate return on your contribution.
Mortgage overpayments are worth considering once those foundations are in place, but the decision is not straightforward. Zoe Brett, financial planner at EQ Investors, points out that even modest overpayments can reduce the total interest owed and shorten a loan term, which can ease pressure if rates rise. However, Ryan Jackson, associate financial planning director at Rathbones, notes that investment markets have historically delivered returns that exceed typical mortgage rates over the long term, though this is not guaranteed. The right call depends on your risk tolerance, your investment timeframe and the rate on your mortgage. James Harrison, chartered financial planner at Path Financial, adds a practical point: equity built up in a property is illiquid. You cannot get hold of it without remortgaging or selling, so overpaying a mortgage is not the same as building accessible savings.
Student loans sit in a separate category entirely. Financial advisers caution against treating them like a credit card or bank loan. Because repayments are linked to earnings rather than to the outstanding balance, the debt functions more like a graduate tax than conventional borrowing. The balance may be written off before it is fully repaid. Jackson says it is not worth making extra repayments on a student loan if doing so comes at the expense of building savings or contributing to a pension.
Underlying all of this is a point Ponniah returns to with every client: money is deeply personal. The right decision depends on your specific numbers, your career trajectory, and how you personally respond to financial risk. ‘Seeking financial advice can help ensure that money is directed to where it is likely to have the greatest impact on your overall financial wellbeing,’ Jackson says. When investing, your capital is at risk and you may get back less than you put in. Past performance does not guarantee future results.
