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What Should You Do First, Save or Pay Off Your Debts?

Savings provide you with financial security in the short and long terms. Putting some money away regularly is a great habit to get into, and you should get started as soon as possible. 

However, should you prioritise your savings ahead of paying off your debts? This article aims to answer this question. Financial planning for your long term future is crucial; when considering your pension, take on expert advice from a specialist such as Portafina.

Save or Eliminate Your Debts?

Saving has a more positive feeling to it, as you are accumulating funds and can watch them grow. However, the straightforward answer to whether you should save or eliminate your debts first is the latter.

The simple truth is that there is little point in putting some money aside into a savings account while you are likely to be paying more in interest on loans and other credit. Even if you are saving substantially more than you are paying in servicing alone, the interest you receive on your savings will be considerably lower than that applied to your debts.

Therefore, it makes sense to concentrate on eradicating your debts first. Doing so means you can put the money you were paying on interest into your savings.

When clearing your debts, starting with higher interest obligations is best. For instance, you might have a large outstanding balance on a credit card that charges high and compounded interest. Eradicating these debts quickly will put more money back in your pocket to put towards your savings.

Exceptions

Of course, there are a few exceptions, as there are with most rules. Here are a few occasions where you might be best to retain your debts:

  • Mortgages
  • Student Loans
  • Interest-Free Credit 

Let’s look at each of these.

Mortgages

Some debts come with additional charges for early repayment, most notably mortgages. These costs can be considerable, often running into thousands of pounds. Therefore, it may not be financially beneficial to repay these loans and incur such hefty charges.

Indeed, a better option could be to put the money you would use to repay the loan into a savings account where you can accrue some interest. Of course, every situation is different. Therefore, it may be best to consult a financial advisor to help decide your best course of action.

Student Loans

One of the benefits of a student loan is that its interest rates are generally kept in line with inflation. Also, eventually, your obligation is written off, and you don’t have to start repaying until you earn a certain income level. In situations where you don’t have to repay your student loan, saving is a better option.

Interest-Free Credit

Many retailers offer interest-free credit deals on large appliances, furniture, cars, etc. If you have managed to secure such credit, it makes sense to use it to your advantage.

In such situations, it makes sense to save your money ahead of repairing your loan. However, you must ensure you repay it before the interest-free period ends. Otherwise, the interest rate could rocket, and you could find yourself with considerable monthly repayments.

Is Saving Still Viable?

Saving is an excellent habit, both for short-term provisions such as emergencies and for the long-term and your retirement. Therefore, we would always recommend you save as much and as often as you can.

However, there is no point in saving if paying your debts is causing you to have a net loss. Therefore, to answer the question, what should you do first – save or pay off your debts? We say eradicate your debts. Just remember to be savvy with the exceptions such as mortgages, student loans, and interest-free credit.

Last Updated on 4 weeks by Lavania Oluban

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