A big question in the world of personal finance is whether you should put more money into savings or pay down debts. Sometimes, it can be challenging to figure out which path is best. While there isn’t a single “right” answer to the question, there are some guidelines to consider. Before you decide whether to save or pay debts, let these ideas roll around in your brain.
It’s almost inevitable; you will face a financial emergency at some point in the future. Since this should be treated as a fact, you need an emergency fund. Now, the amount you need varies depending on a few factors. But there are standards to get you started.
First, you want to save enough money to cover your insurance deductibles. Even if you have respectable insurance coverage, you will likely owe a deductible for any claim. Find out how much that is and bank that amount of money, period.
Second, try to stash a bit more to handle emergencies that would keep you from making it to work. For example, if your car broke down and you wouldn’t be able to get by without it, add additional funds to cover emergency repairs. Make sure you estimate the cost of parts and labour. If you aren’t sure how much to save and you have repair records for the past year, make sure to bank at least that much.
Finally, add another £500 for unexpected emergencies. For example, if an appliance fails, you want the option to replace it quickly. Even tenants need to make sure they have extra funds for emergencies. Just because you don’t own your property that doesn’t mean you won’t get caught if something breaks. For example, you may need to eat at restaurants until the property owner is able to repair and appliance, which costs more than eating at home.
The idea behind an emergency fund is to make sure that you can handle yourself without adding debt. This goes double if you don’t have the best credit score.
Once you have an emergency fund, it is time to pay down debt. Generally, no savings account is going to offer you an interest rate that compensates for what you owe to lenders. Financially, getting your debts paid as quickly as possible, after your emergency fund is in place, is the smart way to go.
Point every extra pound at your debt with either the highest interest rate or smallest balance. Keep going until that debt is paid off. And, don’t forget, you can make payments at any time. This means you don’t have to wait until your normal repayment date. By applying money as quickly as possible, you can save even more interest in the long run.
After that debt is repaid, take the money you normally sent that lender and apply it to the remaining debt with the highest interest rate or smallest balance. Repeat the process until all of your debts are fully repaid.
Now Save Again
After your debts are repaid, it is time to save again. Consider any big purchases you would like to make, like a car or home, and save accordingly. Ideally, you will be able to save enough to either pay in cash or have a substantial down payment.
Don’t finance small purchases, especially anything unnecessary for daily living. Restrict yourself to the cash you have available as often as possible. Before you know it, your financial future will look entirely different than it does today.