Should you first repay debts or save cash instead?

Those with both debts and savings are seriously overspending. The solution is simple. Pay the debts off before you save, maybe even including your mortgage. Forget the old ‘must have an emergency savings fund' logic, getting rid of debts beats that too.

Put most simply, when you save money you're actually lending your cash to the bank for it to lend on to other people. The difference between the rate at which it borrows money from you (the savings rate) and the rate it charges others (the borrowing rate) is its profit. Therefore, on the whole, it'll always cost more to borrow than you can earn by saving. This is why I find it deeply frustrating that many people have both borrowings and savings at the same time, often with the same bank. Effectively it is lending you back the money you lent it, except charging you much more. Ridiculous! The rule is based on the fact that the cost of debt is usually much higher than the benefit gained from savings. Therefore your pocket gains more by getting rid of the debt than starting to save. The exceptions are in the few occasions when debts are cheaper than savings, or cost so much to pay off that there's no point:

• The penalty exception. If you're locked into the debt, so that paying it off incurs a penalty, as with some loans or mortgages, then leave the cash sitting in a savings account until the penalty's small enough that it doesn't matter.
• The interest-free / very cheap debt exception. Debts cost. Yet those who carefully and conscientiously manage their debts so they're constantly interest-free should follow the opposite logic.

If the interest rate on your debt is less than the amount your savings earn after tax then, providing you're financially disciplined, you can profit from building up savings and keep the debts. In effect, you're being paid on money lent to you by the banks for nothing. Emotionally, many will find what I'm about to say difficult to deal with. The idea of having some cash in a savings pot feels safe, especially as traditional budgeting logic berates us to always have an ‘emergency cash fund'. I disagree. It's a must-do aim for the debt-free, but for anyone with expensive debts – particularly on credit cards – it's silly. The right thing to do is still pay off your debts with savings, including your emergency fund. Yet don't cut up your credit cards, it's important to keep the credit available in case of a substantial emergency (and substantial means just that, your roof falls in or you can't feed the kids; not a new plasma TV).