Is it better to pay down debt or save money? The jury might be out on this one. Many financial gurus advise that you get out of debt before you start saving or investing. But this isn’t always the best option for everybody. For example, if you’re close to retirement, delaying saving and investment to pay debt first can cost you significantly.
The good news is that, in many cases, it is possible to pay down debt and save money at the same time if you stick to a few good principles.
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Build an emergency fund
If you don’t have an emergency fund yet, you should work on building one before you pay off anything else. Experts recommend having at least three months’ worth of expenses saved up. But saving that much money can be challenging, especially if you have debts to pay off.
One solution is to work towards your emergency fund slowly, while you’re also paying your debts. For example, let’s say you want to start with a basic £1,000 in savings.
Decide how soon you want that money in your account. If it’s six months, you would have to put £200 aside each month to reach that goal. If you have large debts to pay off, you might only be able to put aside £100 each month.
Sit down and figure out your budget
How much you can save and put towards debt depends on how much money you have available every month. If you really have no idea of your incomings and outgoings, you need to work with a monthly budget to figure that out first.
Make a list of all of your debts and the minimum payments for each one and add that to your monthly expenses. If you’re committed to making paying down debt and saving happen at the same time, you’ll need to add both as regular expenses to your budget.
Expecting to just ‘find’ extra money at the end of the month can be stressful and unlikely to work out. If the numbers simply don’t add up, it’s time to start cutting costs somewhere so that you can reroute more money towards debt repayment and savings.
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Prioritise your debts
Since part of your money has to go towards savings, you won’t have much left over to pay towards debt. Always make sure you still make the minimum payments on each debt so that they don’t go into default or end up accruing late or penalty charges.
Any extra money you can send towards debt should go to your priority debts. According to The Money Advice Service, these include:
- Eviction notices for late rent or mortgage payments
- Essential services that might be disconnected if you don’t pay
- Court fines
- Council tax and income tax
- Child maintenance
- Any overdue or missed payments to the Department for Work and Pensions
Once you take care of these, the next debts on the list should high-interest credit card balances. Throw any extra money you have into this debt and only pay the minimum to all other debts. Once this debt is paid off, move on to the one with the next highest.
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