The following situation is not uncommon: you have several loans and outstanding amounts on your credit card. At the same time, you know it is good to have some money set aside, so you make an effort to grow your savings in the bank.

What’s wrong with that? The answer is: it depends. It is important to look closely at the details… or more precisely, at the interest rates—those on your loans and those on your deposits.

Everyone knows that interest rates on loans are higher—often significantly higher—than those on deposits. From there on, it is a matter of simple calculations. Ask yourself whether it makes sense to earn, for example, 1% interest on your deposit while owing money on a credit card with an interest rate of 17%. It is hardly reasonable to hesitate to break a deposit while at the same time paying for an expensive loan.

Our advice is to put emotions aside and look at the situation objectively. Here are some practical steps that will help you make a realistic decision:

• List all your liabilities, placing the most expensive ones (with the highest interest rates) at the top. Be sure to include not only credit card debt or “quick loans,” but also consumer loans, installment purchases, leasing arrangements, and similar obligations.

• Make a list of all your savings—where they are held and what return they generate. Most likely, they are kept in deposits (at least the larger portion), so note the interest rate applied.

• Compare the two lists—both the amounts and the interest rates. This comparison will show you whether it is beneficial and feasible to repay some or all of your expensive loans using part of your savings.

• Check the terms and conditions for early repayment of the debts you plan to “tackle.” Also review the conditions for early termination of your deposits.

• ESPECIALLY IMPORTANT – do not touch your emergency fund! No matter how enthusiastic you may feel about paying off some of your obligations, do not be tempted to leave yourself without “money for a rainy day.” Whatever you decide, this fund must be maintained. Its size depends on your preferences and possibilities, but as a starting point, set aside enough to cover at least three months of living expenses. Otherwise, something as simple as a car breakdown could force you into taking out another expensive loan.