Should I Repay Debts or Save?
Anyone with both debts and savings is losing out big time (or as Donald Trump would say, bigly). The good news is that the solution is simple: Forget about saving and pay off your debts instead. You’ll save a fortune. Here is why:
Pay off debts with your savings
We always hear things about not saving enough, and it’s true in certain circumstance. If you have expensive debt, it is always better to pay that off first.
Debts usually cost more than savings can earn, so get them paid off instead of saving and you’ll be better off.
There are three exceptions to this rule:
- Interest-free debt. If you have an interest free period, or a really low interest rate (below whatever you can earn as savings) on a credit card or loan then it’s worth holding off until that period ends. Be careful though, if you’re not the sort of person to stay on top of this stuff, you could well run into tough penalties once the free period ends.
- Penalties. Some loans or debt - especially mortgages - can come with a penalty for early repayment. If this is the case, leave your savings sitting in an account until the penalty period ends or is low enough not to matter.
- Saving for specific events - sometimes saving for a birthday or Christmas can make sense as long as the amounts are relatively small (until you’ve paid off all your debt, then knock your socks off!).
Pay off the expensive debts first
If you don’t have enough savings to pay off all your debts, prioritise them in order of the most expensive, then pay them off first. For example, typically a payday loan or credit card will be an expensive debt, at 15%+ interest rate. Similarly, a mortgage is usually a relatively cheap debt, typically at around 2-5% interest rate, so only start paying that off when all the expensive debts are sorted.