As a general rule, it’s a good idea to repay debt before focusing on savings. But, it depends on several factors which we’ll talk you through below.
When it comes to debt and saving, it doesn’t have to be an all-or-nothing approach. It’s wise to do both and have a healthy amount of savings for an emergency or other financial goals you want to work towards. Building savings means if the unexpected happens you won’t have to add more to debt.
When Should I Prioritise Paying Off Debt Before Saving?
In most cases, you should prioritise paying debts first. This is because, usually, the interest rate you’re paying on debts, such as credit cards and loans, will be higher than the interest rate you’re earning on your savings.
You could have:
- A savings account that earns 4.5% in interest
- A credit card that charges you 33.5% in interest
This means it costs you more to borrow money on a credit card than you would earn by putting the money into your savings account. So it’s a better idea to pay off the credit card first so you save in the long run.
Are There Any Exceptions Where I Shouldn’t Pay Off Debt First?
For certain debts, there may be an early repayment fee, so it wouldn’t make sense financially for you to pay off the borrowing early. Debts such as loans or mortgages have set repayment timelines and the lender won’t let you pay early without charging you. In this case, it’s probably a better idea to take advantage of building up your savings pot instead.
It’s also worth looking at the interest rate on your debts. If you have 0% interest for a set period, it might make more sense to save money instead and allow it to earn you interest. Just be aware that you must clear the debt balance before the 0% interest deal ends, otherwise you’ll have to start paying interest.
Which Debts Should I Repay First?
Short-term debts like overdrafts and credit cards usually have the highest interest rates, so we’d suggest focusing on these first.
Should I Have An Emergency Fund?
We’d recommend having at least three to six months’ worth of expenses set aside in a savings account for emergencies. An emergency fund is for situations such as losing your job, long-term illness or other unexpected things that may crop up.
Should I Overpay or Pay Off My Mortgage With Savings?
It depends on your personal circumstances. Many mortgage lenders will let you overpay your mortgage by 10% of the outstanding balance each year. It could mean you save thousands of pounds of interest if you make a regular overpayment. You can see how much you would save using Money Saving Expert’s mortgage overpayment calculator. We would always recommend paying off debt that is high-interest first, rather than paying more towards your mortgage. Once you have paid off your debts, can live comfortably and save, it would be a bonus if you did want to overpay your mortgage.
Need Help With Your Debts?
Get your no-obligation debt advice today to fully understand your options and what debt solutions you would qualify for. You can start online anytime using our online debt advice tool. If you’d prefer, you can speak to the friendly and experienced debt advisors at Angel Advance. We help people daily with their financial goals, offering no-obligation debt advice day and night! Visit our online debt advice tool for help with debts, or contact our team via email, phone or WhatsApp today.
