Student loans, credit-card balances, car loans, and mortgages—oh, my. You probably have a variety of debt—most people do. So which should you focus on paying off first? And how can you save at the same time? Of course, make sure you pay at least the minimum required—and on time—to keep all loans in the black.

After all, defaulting on credit card, car loans, student debt, or home mortgages can destroy your credit rating, and risk bankruptcy.

Assuming you are meeting those primary obligations, here's a guide to help you pay off debt while saving for emergencies and long-term goals like retirement. It may seem counterintuitive, but before you tackle debt, make sure you have some "just in case" money and save for retirement. Here's a guide.

1. Set aside money for an emergency

Losing your job—or being hit with an unexpected expense—could force you into a financial hole, which may take years to climb out of. How much to set aside for an emergency depends on your situation. In general, six months of expenses is a good starting point.

Quick tip: Set up automatic payments from your current account straight after pay day and pop that money into a separate account set up as an emergency fund.

2. Don't pass up "free" money at work

Paying down debt is important, but if your employer matches money you put into your company pension don't pass it up. Think of it as "free" money. If you earn £60,000 a year and contribute 3% or £1,800 to your pension pot and your company contributes a further 3% (another £1,800), assuming annual growth of 5%, in 10 years’ time that £3,600 a year could grow to more than £47,000. 1

Quick tip: Give this money a chance to grow. If retirement is years away, that means leaning more toward stock market-based investments.

3. Pay this debt down first: high-interest credit card balances

It can be easy to run up a large credit card balance. And once you do, it's not easy to pay it off. If you only pay off the minimum each month you will pay more interest, and it will take much longer to pay off the balance. So ideally pay off the balance in full. Or at least try to pay more than the minimum each month.

Credit cards can be a rewarding way to pay however, if you use them wisely. If you are diligent about paying off your entire balance monthly, you may want to consider a cash-back rewards card. That way, your credit card purchases can actually help you accomplish other financial goals.

Quick tip: Check your credit card statement to see how long it will take you to pay off the balance—and how much it will cost you—if you make only the minimum payment.

4. Contributing beyond the employer match in a company pension

While you may still have a student loan or mortgage, these loans typically have much lower interest rates. That's why it can make sense to increase your pension contributions and continue to make the minimum monthly payments on these loans rather than trying to pay them off earlier.

Your pension savings can really add up. Say you contribute 10%, or £6,000 a year, about £115 a week, of your £60,000 salary to your pension pot and your company adds £900. If you do that every year, in 10 years that £6,900 a year could grow to more than £90,000, assuming a hypothetical return of 5% per year.2

Quick tip: Increasing your savings by just 1% each year could help you live the life you want in retirement. Aim to save at least 15% of your pre-tax income every year starting at age 25.

In conclusion

Paying off debt is important. That's why it makes sense to have a strategy that will help reduce what you pay in interest and increase your savings—giving it the potential to grow.

1Assumes growth of 5% a year, which is not guaranteed.

2 Growth of 5% a year is not guaranteed.

Important Information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.

Eligibility to invest into a pension and the value of tax savings depends on personal circumstances and all tax rules may change. You will not normally be able to access money held in a pension till the age of 55.