How to Create Savings While Paying Off Debt

For many Australians, debt is now a normal part of life. The Reserve Bank of Australia has noted that household debt relative to income rose from around 70 per cent in the early 1990s to around 190 per cent by 2018, which helps explain why so many people feel like getting ahead financially is harder than ever.

The good news is that paying off debt does not mean you have to put savings on hold forever. With the right structure, you can start improving your position on both fronts. It is less about dramatic overnight change and more about getting your money working with purpose.

Review your debt and decide what to pay off first

The first step is to understand what you owe and what each debt is costing you.

Common debts might include credit cards, personal loans, car finance, HECS-HELP and a mortgage. Not all debt is equal. In most cases, high-interest debt should be tackled first because it drains cashflow faster and makes it harder to build traction elsewhere.

This gives you a clearer repayment order and helps reduce the financial “drag” caused by expensive borrowing.

Review your household budget

If you do not already have a household budget, start by looking through the last few months of bank statements and categorising your spending.

Include your fixed costs such as rent or mortgage repayments, utilities, insurance and transport, then allow for variable costs such as groceries, eating out and discretionary spending. This process is rarely thrilling, but it is where clarity begins. Financial fog loves vagueness.

A simple spreadsheet is often enough. The goal is not perfection. The goal is visibility.

Eliminate unnecessary spending

When you review your spending, there is a good chance you will spot transactions that are not adding much value.

Unused subscriptions, impulse purchases and convenience spending can quietly siphon off money that could otherwise go towards debt reduction or savings. That does not mean cutting out every enjoyable expense. A plan that feels punishing usually does not last.

Instead, decide what stays, what goes, and what gets trimmed. Even a modest reduction in weekly spending can create room to save while you continue paying debt down.

Pay yourself first

One of the most effective ways to build savings is to automate it.

A simple approach is to transfer a set amount, or a percentage of your income, into savings as soon as you are paid. That way, saving becomes part of the system rather than something you hope happens at the end of the month.

Once savings start to accumulate, you may eventually choose to invest part of that money depending on your goals, time frame and risk tolerance. ASIC’s Moneysmart explains that compound interest can significantly grow regular savings over time, and its compound interest calculator is designed to show how repeated contributions and time can build momentum.

Use credit cards carefully

Credit cards can be useful, but only if they are managed well.

If possible, pay the balance off in full each month. Paying only the minimum may feel manageable in the short term, but interest charges can make that debt much more expensive over time. If credit card debt is lingering, it is usually a sign that the card is working harder than your cashflow can comfortably support.

Be strategic with your mortgage

If you have a mortgage, it is worth understanding how extra cash can work most effectively.

Making additional repayments can help reduce your loan balance, but an offset account may offer more flexibility while still reducing the interest charged on your mortgage. Moneysmart notes that mortgage offset accounts can reduce home loan interest while keeping your money accessible, which can be useful if you are trying to build savings and keep optionality.

This approach will not suit everyone, but it can be a practical way to balance progress on debt with access to cash reserves.

Consider small automated savings tools

For some people, saving works better when it happens in the background.

Micro-investing and round-up apps can help by putting aside small amounts regularly. On their own, these tools will not transform your finances, but they can be a useful behavioural nudge, especially for people who struggle to save consistently through larger transfers.

The real value is often in the habit they create.

Looking at the numbers

Let’s say Jessica has a take-home income of $5,000 a month and sets up an automatic monthly transfer of $500 into savings.

After two years, she would have saved $12,000, ignoring interest for simplicity. If she then invested that balance and continued contributing $500 a month, growth could build meaningfully over time. Using a 7 per cent annual return as an illustration, that balance could grow to roughly $106,000 after ten years. This is an example only, not a guaranteed outcome, but it shows how regular contributions and compounding can work together. The Moneysmart compound interest calculator is a useful tool for modelling this.

Consistent small actions lead to big results

Debt can make it feel like financial comfort is always somewhere off in the distance.

But progress does not usually come from one heroic move. It comes from many smaller decisions made consistently over time: prioritising high-interest debt, tracking spending, automating savings, using credit carefully and making smarter use of spare cash.

Everyone’s circumstances are different, so strategy matters. The right plan can help you reduce debt, build savings and feel more in control of where your money is going.

Sources

• Reserve Bank of Australia, household debt-to-income commentary and statistics.

• ASIC Moneysmart, compound interest calculator and compound interest guidance.

• ASIC Moneysmart, mortgage offset account guidance.