Should you save, or pay off loans and cards?
You will rarely be able to earn more on your savings, than you will pay on your borrowings. So, as a rule of thumb plan to pay off your debts before you start to save.
- Paying off your debt
- When to start saving
- Get into the savings habit
- The Personal Savings Allowance
- What about paying off your mortgage early?
- What about an emergency fund?
Paying off your debt
If you are paying more for your borrowing than you are getting on your savings, then it makes sense to pay off your loans – so long as you can access funds in an emergency (see more on this below) and provided you will not incur high penalties for repaying your loan.
Once you’ve cleared your debts you are freed up to save more and faster.
If you have several debts to clear, aim to clear the most expensive ones first. These are the most common examples:
- most credit card debt
- store card debts
- unauthorised overdraft
- catalogue shopping
- pay-day loans
- door-to-door lending (home credit)
When to start saving
High interest charges on the most expensive forms of debt make it harder to put money aside, so clear these first.
Generally it’s fine to save and have some debt as long as:
- you’re keeping up with your mortgage payments
- you’re paying off your credit card bill each month
- you don’t have other loans or credit commitments that are costing you more in interest than you could earn on your savings
Get into the savings habit
Regular saving is really important. Make it easy by setting up a standing order or Direct Debit to move money into a savings account regularly so you don’t spend it or forget to put it aside. After a while, you won’t even miss it. And, to save even faster, why not set a savings goal so you know:
- how much you are going to save
- how long it will take you to reach your goal
If you pay tax you’ll probably want to start by thinking about tax efficient savings, like making the most of your ISA allowance. Follow the links below to find out more, including when and why it’s important to start saving into a pension.
The Personal Savings Allowance
As of April 2016 you are entitled to a personal savings allowance. This means you don’t pay tax on the first £1,000 you earn from savings (or the first £500 if you’re a higher rate taxpayer).
What about paying off your mortgage early?
If you have cash to spare you might wonder about reducing your mortgage. Read our guide below for things to think about when weighing up whether this makes sense.
What about an emergency fund?
Ideally you should aim to have three months’ money in reserve as part of your savings. However, if you have debts use the money to clear these first provided you have access to emergency funds such as a credit card.
However, if an emergency arises and you have to you go for this option, it’s important not to start using the card for other purchases, as you will risk running up yet more debt.