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Should You Pay Off Debt or Save for an Emergency First?

By Sabrina Loh

Debt can feel overwhelming, especially when it feels like it’s hindering your ability to save.

So this raises the question — is it better to pay off debt first or save for an emergency?

The short answer is, both.

We’ll explain why.

Interest Cost

Let’s say you have a credit card debt of RM6,500 with an annual interest rate of 19.5%, and every month you pay the minimum of RM130.

It will take you at least nine years to fully pay off your debt and will cost an additional RM7,000 in interest accrued.

If you have an additional RM250 to add to your payments, this will reduce your pay-off period to one year and nine months, and cost you around RM1,100 in interest.

Just an additional RM250 a month can result in saving you RM5,900.

When you have a lot of debt to clear, especially high-interest debts like credit cards, it’s important to prioritise paying it off so you don’t end up paying more than you borrowed in interest.

Emergency Savings

Although it’s important to pay off your debt, it’s also just as important to have emergency savings. because life is full of uncertainties — you can never plan for when you’ll need to visit the ER, your spouse losing their job, or when your car breaks down.

Without designated emergency savings to pull from during a crisis like this, it could lead to you taking on more high-interest debt to weather the storm, making your overall debt problem worse.

Ideally, you should have six months' worth of expenses saved up for your emergency fund. But this may not be realistic if you’re struggling financially or drowning in high-interest debt.

However, having at least three months’ worth of emergency savings is better than nothing. You can always focus on building that more once you’ve lowered your debt or improved your financial situation.

Finding a balance

Budgets are a great way to help you gain control of your finances so you can simultaneously pay off debts while building your emergency savings. There are many types of budgets and you just have to find one that suits you.

It also helps to track your expenses to gain a clear picture of where you’ve been spending your money, and how you can divert that to your debt repayment and emergency savings instead. Our BigPay app automatically tracks and categorises all your expenses on one screen.

But one thing is for certain — it’s never too late to start.

Tune in to our BigPay blog every week to improve your financial knowledge.

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