A few short years ago, nearly everyone had a job. Money was bountiful, and if you couldn’t afford something, there was always a bank or credit card provider ready to help you out. With finance so easily available, saving your dollars was the last thing on anyone’s mind.

How times have changed! With record levels of unemployment, falling property prices, and global financial meltdown, people are no longer confident that they can afford to spend. If you are lucky enough to have a few spare bucks at the end of each month, it often seems prudent to put it away in a savings account, to keep it until you really need it.

But stop! Are you also paying off a credit card bill each month, with a balance that never quite seems to clear? If so, you’re in good company, but consider this fact. Financial institutions operate, on a simple level, by buying money at one price, and selling it at a higher price. One place they ‘buy’ money from is you, when you open a savings account. They may compensate you for this in the form of interest, but you can be sure that what they pay is insignificant compared to what they will charge people borrowing.

Of course, this is a simple view of things, but it does describe in general terms how financial markets work. When you deposit money with them, the rewards will be small, or perhaps non-existent. When they offer money to you, rest assured that the interest will be much higher.

Nowhere is this more evident than with credit cards, which average at around 15% APR, give or take. A good savings account, by contrast, may earn you 2% APR, but often even less. So let’s have a look at what this means to someone with $100 of debt on their plastic, who pays off $10 a month, and saves $10 a month too. Each number below represents a month, and the figures show the card balance remaining after the $10 has been paid, and interest has been applied. In brackets, I show the running total of the savings account.

1. $91.21 ($10.00)
2. $82.29 ($20.00)
3. $73.26 ($30.02)
4. $64.11 ($40.05)
5. $54.83 ($50.10)
6. $45.43 ($60.17)
7. $35.91 ($70.25)
8. $26.26 ($80.35)
9. $16.47 ($90.47)
10. $6.56 ($100.61)
11. $0.00 ($114.19) this figure includes $3.44 extra that was not needed for the credit card payment.

In the 11 months it took to clear your debt, you spent $220, and are left with $114.19. You paid the card provider $106.56 in total.

Now consider another scenario. Instead of saving $10 each month, put it towards your credit card payments instead until it’s paid off, and only then start putting the combined $20 monthly payments into your savings account. Here’s how that works out:

1. $80.13 ($0.00)
2. $60.24 ($0.00)
3. $40.30 ($0.00)
4. $20.34 ($0.00)
5. $0.34 ($19.66)
6. $0.00 ($39.66)
7. $0.00 ($59.69)
8. $0.00 ($79.76)
9. $0.00 ($99.86)
10. $0.00 ($119.99)
11. $0.00 ($140.16)

That’s a big difference: for the same amount of spending each month, you have now earned about 22% more.

So the lesson is simple: before you start a savings regime, make sure you take care of your high interest debt first. In the long run, it’s the best savings plan you can get!