Saving Money vs Clearing Debt

images (3)Many of us don’t have enough money set aside for a rainy day. One study found that four in ten UK adults don’t have £500 in a savings account – while another found that 28% have nothing at all in their bank.

Yet, while there’s clearly work to do to encourage the right attitude to savings there is a balance to be struck here. Saving money is important, but so too is paying back the money we owe. Indeed, Bank of England Governor Mark Carney has spoken out about his concerns over the rising levels of debt carried by households in the UK.

In an ideal world, you’d squirrel away plenty of cash at the same time as clearing your debts. But, while that is sensible and you shouldn’t see this as an ‘either/or’ question, there are some things to bear in mind if you are going to get the balance right.

Interest rates

It’s important to consider the full cost of your debt, once interest is taken into account.
By only making the minimum payment on your credit card balance, for example, you might be doing little to chip away at the overall debt and be accruing a fair amount of interest in the process.

It’s important to weigh up the respective interest rates between your savings and debts. It’s likely that your debt will rise at a much faster rate than your savings – especially given the low rates currently available to borrowers – and so every pound you put towards chipping away at your debt will ‘work harder’ for you than it would sitting in your savings account.

Types of debt

There are some debts that have to be treated as a priority and paid off as soon as possible and others where it makes sense to slowly and sensibly pay them off over a longer period.

It’s no exaggeration to say that credit cards, overdrafts and pay-day loans, for example, cost you more every day you have them and need to be addressed before you consider saving. Other debts – interest-free finance on furniture, say – should be a part of your long-term budget plan and might actually cost more to ‘settle up’ in advance if there are fees associated with this. These are usually set payments every month that are easier to plan around when drawing up a sensible budget plan.

Sensible savings habits

It’s important to foster a healthy attitude towards saving. You need to commit to saving something every month – however small – to ensure that you have a regular habit but you also need to be prepared to be flexible.

So, if you’ve settled debts or come to the end of a loan say, then divert the money you had previously spent on servicing this into your savings. You won’t miss it and because it’s been in your budget it should be a manageable payment.

Set a savings goal and break this down into a monthly or even weekly figure, so that you can see the long-term benefit of saving relatively small amounts of money.

A sensible goal, as the Money Advice Service notes, would be to save three months worth of spending as an ‘emergency fund’.

It’s important, therefore, to make a commitment to save every month. However, in order to get the balance right, the amount you save should take into account the debts you have and the nature of those debts.

Join our newsletter

If you like Critical Financial, subscribe and get our latest content via email.

Powered by ConvertKit

Share this post:

Leave a Comment


May the 4th Be with You: Star Wars Swag on Amazon

May the 4th Be With You: Star Wars Day Swag

It began as the punniest holiday ever but quickly grew into an earnest (if somewhat random) celebration of the long-running (and still... more →
People count the money to buy a house in future success.

Avoiding Mortgage Scams: Don’t Fall for Unreasonable Promises

If it sounds too good to be true, it probably is. That’s sound advice for almost all aspects of life, including the search for... more →
Eat for free for a whole month via the meal kit companies discounts for new customers.

How To Get a Month of Free Food: 9 Meal Kit Companies Offering Discounts to New Customers

Play your cards right and you might be able to line up a month’s worth of free meals if you were to try out all nine of the meal... more →
Generate extra cashflow -- here are 97 ways.

96 Awesome Ways to Generate Extra Cashflow

Who doesn’t want more money nowadays? We’ve got you covered on that front. Here comes a long list of different ideas on... more →
Valentine's Day gifts that won't destroy your budget

Valentine’s Day Crafts Are Romantic Rescue from Crazy Inflation

Fall for the hype this week and you’re out an average of $143.56 for Valentine’s Day. Crafts and other do-it-yourself tactics... more →

Ultimate Guide to Bitcoin — FREE Ebook!

Have we got something for you: a free ebook about bitcoin! more →
Get a flu vaccine.

Why You Need To Get a Flu Vaccine Right Now

Flu vaccines aren’t just for the elderly  anymore. Here are 25 reasons you should go get vaccinated. more →
Financially successful

Acquire the Trait All Financially Successful People Have

Financially successful people tend to all have a lot of self-discipline. Improving your discipline in one area of your life often spills... more →

What’s the Best Free Recipe App?

The Apple Store and Google Play together offer more digital cookbooks than you probably have room for on your mobile device. So which... more →
New tax law might slow down housing market.

What Will the New Tax Law Do to the Housing Market?

The new tax law will have a profound impact on the housing market, although in ways that go beyond the deductibility of mortgage interest... more →

4 in 5 Households Will Get a Tax Cut in 2018

Four out of five U.S. households will get a tax cut as a result of the legislation that President Donald Trump signed into law today. more →
Will bitcoin reach $100,000?

When Will Bitcoin Reach $100,000?

Bitcoin has accelerated its pace of appreciation in recent months, and if the current levels between $15,000 and $19,000 make you itch... more →
The Dow Jones topped 24,000 -- now what?

The Dow Jones Crossed the 24,000 Threshold. Now What?

Stocks appear to be increasing in volatility, yet the markets closed on Monday, December 4 with the Dow Jones Industrial Average is... more →
Peer mortgage

Should You Get a Peer-to-Peer Mortgage?

If you can’t get approved for a home loan from a bank, you might want to look into applying for a peer-to-peer mortgage. more →
Investment gifting is awesome.

4 Things To Know Before You Donate an Investment

While donations of any kind are appreciated, gifting investments benefits both the giver and the receiver. Here are four key things... more →
Are you wondering: What's the Relationship Between the Stock Market and Federal Debt?

What’s the Relationship Between the Stock Market and Federal Debt?

Wouldn’t it be wonderful if gains in the stock market could actually reduce U.S. government indebtedness? If that were true,... more →

How to Get Ahead in the Property Investment World

Getting ahead in any kind of investment game always takes a little bit of hard work and ingenuity, so this is a handy guide designed... more →