By Philippa Billings, Chief Advice Officer, Otivo
Pay off debt or build savings is one of those questions that feels like it demands a single, disciplined answer. Clear the debt, says one camp. Always have savings, says the other. In practice, the smartest move is usually a sequence rather than a choice, a little of one, then a lot of the other. Here's the order that tends to work.
Rather than choosing one, a common approach is to build a small emergency buffer first, then focus on paying off high-interest debt, while keeping that buffer intact. The buffer stops an unexpected cost from pushing you back into debt. As at July 2026, once high-interest debt is cleared, attention usually shifts to growing savings more fully.
Is it really an either/or?
Not usually. Framing it as a stark choice misses that the two goals support each other when done in the right order. A sensible sequence beats an all-or-nothing approach, because tackling only debt leaves you exposed to the next surprise, while saving hard with expensive debt untouched lets that debt keep costing you. The question isn't which one, it's which first, and then how to move between them.
Why build a small buffer first?
Because without any buffer, debt repayment is fragile. If you throw every spare dollar at debt and then face an unexpected cost, a car repair, a dental bill, you have nowhere to turn but back to credit, undoing your progress. A modest emergency buffer, even a few hundred to a thousand dollars, acts as a circuit breaker, absorbing surprises so they don't reverse your hard work. It's a small pause before the main push, and it makes everything after it more durable.
Why tackle high-interest debt next?
Because expensive debt is the costliest thing on your balance sheet. Once you have a starter buffer, directing your energy at high-interest debt, like credit cards, usually delivers the best return, since the interest you avoid is effectively a guaranteed saving at that high rate, well above what savings would earn. Clearing it frees up the repayments and stops the compounding cost, which is why it takes priority over building savings beyond the initial buffer.
When do you shift back to savings?
Once the high-interest debt is gone. With expensive debt cleared and your starter buffer intact, the pressure lifts and attention naturally turns to growing your savings more fully, expanding the emergency fund towards a few months of expenses and building towards your goals. Lower-interest debt, like a mortgage, can be balanced alongside saving rather than cleared first, since its cost is far lower. The sequence flows from most expensive problem to longer-term growth.
How do you balance the two in practice?
The rhythm is buffer, then debt, then savings, with a little flexibility. Building the starter buffer comes first, then the bulk of your spare money attacks high-interest debt, though continuing a small automatic saving alongside it keeps the habit alive. Once the costly debt is cleared, you shift the freed-up money into fuller savings. It's a sequence with soft edges rather than rigid stages, adjusted to your situation.
Frequently asked questions
Should I save or pay off debt first?
A common approach is to build a small emergency buffer first, then focus on high-interest debt, then grow your savings more fully. The buffer stops surprises from pushing you back into debt while you pay it down.
Why not just pay off all debt before saving?
Because without any buffer, an unexpected cost can send you straight back to credit, undoing your progress. A small starter buffer makes debt repayment more durable.
How big should my buffer be before tackling debt?
Often a modest starter buffer, enough to cover a surprise bill, before you focus your spare money on high-interest debt. You grow the fuller emergency fund later, once the expensive debt is cleared.
The answer is usually a sequence, not a single choice. Otivo, a licensed Australian financial advice platform holding AFSL and Australian Credit Licence No. 485665, offers a debt advice module that works with your household income and expenses to find effective ways to pay down debt while covering essentials. It helps you order the steps in a way that fits your situation.
Sources
- ASIC MoneySmart — save or pay off debt — moneysmart.gov.au
Disclaimer
The information in this communication is current as at July 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.