Everyone knows that as a responsible adult, you need to start saving, at some point. Whether it's for retirement, a home, your children's university, or other long-term goals, extra money never hurt anyone, so it's good to have it sitting there and let it build up. But if you've also got debt, it can be difficult to put money aside for both major payments. What do you prioritise? Should you keep paying for both at the same time? Here are 11 reasons why you should pay off debt before saving.
About Debt And How It Affects You
Before discussing anything else, we're going to address debt, in general, what it is, how it affects you, and why it's important to pay it off. Everyone has debt, so it's not necessarily a thing to be ashamed of. Now, depending on how high the amount you owe is, you might be more concerned than others, especially if you take into consideration your income, projected income, expenses, number of children, etc.
Common sources of debt are student loans, personal loans, emergency loans like same day loans or payday loans, and of course, mortgages. That can not only add up to be a very large amount of money, but it can also be quite difficult to manage.
How does debt affect you?
That can affect you in a number of different ways, the most obvious of which is, of course, affordability. Think of all the money you pay every month and the things you could do with it if you weren't in debt. All that money could be going to savings, or just to fund an overall better lifestyle. The faster you repay, the more disposable income you will have.
The other issue you have when you've got debt is the constant risk of defaulting and affecting your credit score. Debt doesn't reflect well on your score at all, and if you become unable to repay, or repay late, that will only drag your score further down, and maybe even cause you to lose an asset.
Having the constant worry and having it hang over your head like a threat is unpleasant, to say the least. No one likes to owe anything to anyone, because it puts you in a vulnerable position. It's much better to pay it off for your peace of mind.
First, A Caveat About Savings
Now, while we're going to talk about the 11 different reasons why it's better to pay off debt before saving, there is a caveat to mention - before you start actively working towards repaying your debt, it's best to make a little nest egg to fall back on, for emergencies. It's good to have around £1,000 in a separate account, just in case something happens and you need money at a moment's notice. That gives you a buffer and some wiggle room, so that you can then focus on aggressively paying your debt.
11 Reasons To Pay Off Debt Before Saving
1. You can't save money if you keep making repayments every month
Most obviously, you can't save money if you keep spending it every month, right? Repayment instalments are a major expense you are saddled with, and that is going to cut into your saving efforts.
Saving is already difficult enough, but if you try to repay debt and save at the same time, you are actively sabotaging your saving efforts. Wouldn't it be better if you were released of your debt obligation and were free to just save money, instead? That way, you're not constantly frustrated by your inability to put any money aside.
2. You can improve your credit score
Do you realize what a negative effect debt has on your credit score? Owing money is not a good look for anyone, and the deeper you are in debt, the harder it is to pay it off. Should you fall behind with payments, skip payments, or even default on a loan or have debt go to a collection agency, your credit rating will suffer a massive hit.
By paying off your debt diligently, you will witness the opposite effect - your credit score will improve, because you are demonstrating financial responsibility and an ability to repay your loans. You come across as a trustworthy borrower and that will serve you well when borrowing in the future, or even renting a home. Experian has some more advice on improving your credit.
3. You don't risk losing assets or falling behind
Debt is a bit of a constant gamble and definitely a stressor, because you never know when your financial situation is going to change. You may be able to pay off your bills now, but you never know what will happen in the future - what if you lose your job? What if your income decreases? What if you fall ill, or are forced to rely on disability?
There are all sorts of things that can happen that can affect your affordability, so repaying as soon as possible means you don't risk falling behind or even losing your assets because of non-payment. You can repay quicker by getting a debt consolidation loan. Step Change has a good calculator to help you assess the situation.
4. You get rid of debt faster
You probably have a timeline for your total repayment, a repayment term, etc. But even so, wouldn't be better if you got rid of debt faster? As we talked about earlier, debt is never something positive, so the sooner you are free of it, the better you will sleep. Just because you have the possibility of repaying for several more months or years doesn't mean you can't make an effort to repay ahead of schedule in order to breathe easy.
5. You can save more by getting to keep the interest on your savings instead of paying debt interest
When you've got a savings account at the bank, you can typically get interest on your money. The more money you have in the bank and the longer it sits there, the more money you acquire as a result. It's a pretty sweet deal, because it allows you to save even more money by doing virtually nothing.
But if you are in debt, all that interest you are earning gets cancelled out by the interest you pay on your loans. In fact, the interest you pay is going to be much more than the interest you earn. Wouldn't it be better to get to keep your interest after having paid off your debt?
6. It's more effective to do things one at a time
I'm betting you are very well aware of the fact that if you try to do several things at once, you won't be able to pay proper attention to anything. The same applies to financial matters and trying to stretch yourself and your money into too many different directions.
It's way more effective to just focus on paying off debt first, putting all of your effort into that and getting rid of it, and then being able to start saving with a clean slate. Otherwise, things get messy, and when you put in half the effort, you get half the result. The Money Advice Service can show you the order to prioritise debt that you need to pay off, according to urgency and importance.
7. You can focus on other things
Having debt is just one more thing to stress over. But what if you didn't have it? That would open up a world of options for you. You could make future plans, make some investments, plan to put money into other things, etc. Getting rid of debt means that part is over and you can now focus not only on saving, but on every other opportunity life offers for someone who is not drowning in debt.
8. Your family doesn't risk inheriting your debt
No one wants to think about a time when they won't be around anymore, but the truth is anything can happen at any time. Especially if you have children or dependents, it's important to make sure that they are taken care of. That includes making sure that they do not end up inheriting your debt, or otherwise that your debt doesn't eat into your estate.
9. You can save money on interest if you repay your debt faster
You probably already know by now that because of how interest works, the longer you take to repay your loans, the more you will end up paying in interest. Depending on how long it takes to repay, you can end up paying much more than you borrowed, which isn't a good deal at all, in the long-run, especially if your ultimate goal is to start saving a significant amount of money. All that money could be going directly into your savings account, so make an effort to repay your debt faster so you can save the interest money.
10. You can dedicate time and effort to something else
Depending on how much debt you're in and how many loans you've taken out, debt management can take quite a lot of time and effort. It's very difficult to stay on top of all of your sources of debt and ensure that everything is getting paid on time, that you are paying the right amounts, that you know how much interest you end up paying, that you are aware of how much you've got to go, etc. All that time and effort you put into paying everything and keeping track of it all could be spent somewhere else.
11. You can use the money for a goal
Even if you don't plan on saving the money you are currently using to pay off your debt, that money could be put towards something else. It's quite a chunk of change you are giving away every month, and over several months, so why not use it for something else that's more productive? Maybe you want to go on holiday, pay for some expensive concert tickets, or take up a class of some sort. Anything you do will be more fulfilling than repaying debt for years to come.
In conclusion, while both goals are important - paying off debt and saving - it's better to tackle the former first, in order to get it out of the way and allow yourself to focus on saving properly for your future plans.