Generally speaking, it makes sense to use any spare money you have to pay off your debt. However, you should also try to save even a small amount. You will then be better able to deal with a financial emergency.
Included in this article:
- Is it better to save or pay off your debts?
- How much should you save?
- How can you save if you are struggling with debt?
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Is it better to save or pay off your debts?
It is normally a good idea to use your spare cash to pay off debt. Generally speaking, the more you can pay back to your creditors each month, the less interest you will have to pay on the money you borrow. That is always a good thing.
However, even where you have debt, putting something aside to save each month is still a sensible thing to do.
The reason for this is there will always be times when you have unexpected expenses. This could be as simple as having to replace your washing machine or pay an unusually high car servicing bill. Perhaps you will have to travel unexpectedly to assist a family member.
What ever the reason, a financial emergency will be far easier to manage if you have savings to fall back on. If you don’t, the only way you are likely to be able to manage is by borrowing more.
It is very important to try and repay credit card or overdraft debt as quickly as possible to minimise any interest charges. However even in this situation, saving just a small amount each month can be a life saver in a financial emergency.
How much money should you put aside?
There is no right or wrong answer to the amount you should save if you are in debt.
In an ideal world, you should have the equivalent of 3 months of your net income in savings to keep you going if you lose your job. In other words, if you bring home £1,500 this would be around £4500. However, if you are starting from a position of zero and are also repaying debt, this is unlikely to be a realistic target.
Instead, try to aim for £1000. This amount would give you enough to replace most home appliance or pay for an unexpectedly high car repair.
At the end of the day, the amount you are able to save will depend on your individual circumstances. But even if you only manage to put aside £10 a month it will be a start.
If you receive Tax Credits or Universal Credit you might be eligible for the Government’s Help to Save scheme. This is a great way of saving small amounts (up to £50/mth). The Government will also pay you a bonus of 50% of the highest amount you save.
If you manage to save the equivalent of 3 months income, you should stop saving. Instead use the spare money you have to repay the debts you owe more quickly.
How can you save if you are struggling with debt?
Of course, it is all very well to say that it is important to save. But how on earth do you do it? Saving is extremely difficult at the best of times so how is it possible when money is tight and you also have debts to pay?
The only possible way to do this is if you make a savings plan.
First decide how much you will put aside each month. Be realistic about the amount. Making the decision to save just £25 a month means that you will have a pot of £300 at the end of the year. Trying to save £100 is likely to be impossible and you will fail before you start.
The most important thing is get into the routine of saving. Once your financial circumstances improve, you will be able to save more.
Second, put your saving money aside save as soon as you are paid or receive your other forms of income. This may be at the beginning, middle or end of each month.
Saving when your money first comes in means it is far more likely you will stick to the Plan. If you wait until the end of the month, it is almost certain that what you had planned to put aside will have been used for something else.
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