Should I Pay Off Debt Or Save First?

Most of us will have some form of debt during our lives, from high interest debt like credit cards and store credit to lower forms of debt like mortgages and student loans. If you’re wondering whether you should pay off debt or save first then you’re in the right place. The choices can seem endless, and there’s no strict right or wrong (as long as you’re not defecting debt payments).

What you tackle first out of debt and savings depends on your financial situation. It might make sense for you to concentrate solely on your debt. But there is a way to pay off debt and save at the same time, as long as you have a plan in place.

Do you have a debt repayment plan in place?

The most important thing to begin with is to ensure you have a debt repayment plan in place. This means working out all the debt you have and how much your minimum payments are each month. If you’re paying all of these off that’s a really good starting place, and if you’re paying more off then great. If you don’t have a plan yet then don’t even think about savings until this is in place.

You should also make sure you have a budget in place to help you be successful. This way you’ll be able to track fixed expenses, your debt repayments and any savings you are going to do. Your goal should be to keep your expenses as low as possible from keeping food costs low to cancelling subscriptions you no longer use. Always make sure you have a small amount for yourself even if it’s just £10 a week so you can have a little treat and not feel like you’re missing out.

Should you pay off debt or save first when you don’t have an emergency fund?

If you’re paying off at least the minimum debt each month and you have a plan in place, but you don’t have an emergency fund then you should start saving now. An emergency fund is for just that emergencies, and can help avoid you getting into more debt in the future. Your savings should contain 3-6 months of basic expenses including rent/ mortgage and your bills. The amount vastly depends on your situation and could be £2,000 for 3 months, or £12,000 for 6 months. But start saving for this emergency fund to help you in the future.

Work out how much you can afford to put aside and continue saving until you have it in place. Make sure you store the money in somewhere you can earn a bit of interest like a cash ISA. But make sure it’s accessible as you may need this money quickly. Once you have an emergency fund saved you can start paying off more of your debt.

When it’s best to pay off more debt

If you’re thinking should I pay off debt or save first and you have an emergency fund (or at least a base in place) then you should consider paying off more debt, especially if you have some high-interest debt. If your debt is costing you 20% in interest and your savings will only earn you 1% then you’re saving money by clearing off your debt quicker.

You can choose to use the snowball method of debt payment where after your minimum payments you start with clearing off the smallest debt and continue on towards the largest one. With this method, you build momentum as you pay off debt and it’s a good psychological boost as you see your debt list getting smaller. This method is good if you have lots of smaller debts with lower interest rates.

You can choose the avalanche method which focus’ on paying extra off debts with the highest interest rate. Once that debt is paid you move to the next until you’ve paid off your debt. This method has the potential to save you the most money so you’ll be paying less interest. Additionally, consulting a debt settlement company can also be a helpful strategy to manage debts effectively.

Should I Pay Off Debt Or Save First? Why you may consider saving

If you have a debt repayment plan in place and you have no super high-interest rated loans you may want to save more money depending on your short and longer term goals. Think about the things that can make you more money in the long run such as your pension. This is especially important if you have an employer pension where they match your contributions (up to a limit). If you’ve not hit that limit then consider investing additional money into your pension.

Thanks to compound interest it will grow well over time (even if your investment doesn’t make much money). And chances are you’ll need all the money you can get when you retire as state pension isn’t that high.

If you’re not already you may also want to consider saving small amounts into sinking funds for things like Christmas, birthday presents that come throughout the year, household costs you may need to pay etc. A lot of things can creep up but by saving a set amount per month you’ll have the money aside.

Do you pay off debt or save first?

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