Pay off Debts First and Save Later or Both at the Same Time? Feeling Overwhelmed

girlagogo

Being a single 42 year old and a late starter in every sense of the word (no pension, no savings and no mortgage) I've pretty much skipped through most of the last 20 years naively and stupidly not planning for the future. Now I'm feeling overwhelmed and in a panic as I need to start saving for a mortgage, paying a pension and paying off my debts and I'm in my 40s. I have a credit card debt of £5k, overdraft of £3500, a loan of £2200 (paid off by September 2017) and rent my home which makes up over one third of my monthly income after tax alone. I also need a new car as mine is over 15 years old and I have just found out that after failing its MOT I would need to spend over £400 to repair it, more than it's worth.

My question is just where do I start? Pay off my credit cards first, then overdraft and loan separately? Take out a consolidated loan to cover all the debts and additional money to buy a cheap reliable car over a longer term? Try and save for a mortgage deposit over the next 3 years at the same time (I'm conscious that this will be a problem as I probably wouldn't have a deposit until I am about 45/46 which means a shorter mortgage term)? Feeling unsure of what to focus on first. By the way I have an excellent credit rating but no real spare cash at the end of the month after all my outgoings.

Kitten868

I think the most important thing is what would improve your mental state more? Having some savings growing really bolsters some, seeing my balances disappear is what encourages me. I would tackle this one challenge at a time. The first challenge is an SOA. There's a link here somewhere. Work out your actual outgoings and see where cutbacks can be made. Look at ways to bring in a bit more. But what would make you happier? I think I'm too much of a scatter brain to handle savings and debt at the same time xxx

lambda

Hi There,

Well done for facing up to this.

If I were you, I'd think about the following steps.

1) You first need to sit down and work out why you are 11k in debt, most because you have been spending money you didn't have on things you probably didn't need. Sit down and do an SOA and calculate all your monthly incomes and outgoings. This will also allow you to work out how much money you have to pay off your debt.

2) Pay off you debts. There is no point saving until you pay these things off. I would also set up an emergency fund for when repairs are due around the house and the car. That way when you need to repair things you have the cash ready to do so and don't resort to your cards.

3) Once your debts are paid off cut up your cards and never use them again.

4) About your car. Buying a newer car is going to a be a lot more expensive than running your old one. I use the moto 'if you can't afford to pay for it outright, you can't afford it.' Taking out a loan for a new car is very expensive and if you are already in debt it won't help you get out of your situation. How often have you had to repair your existing car? Remember, just because a repair is worth more than a car is worth doesn't mean you shouldn't carry it out. I plan to run my car into the ground, so it won't be worth anything but scrap when I am finished with it. It's still cheaper to keep it going by repairing it though. You say it needs a £400 repair. But if that's the only repair it needs in the next 2 years it is a bargain, for example.

5) Clear your debts then save for the mortgage. That's the way I would do it.

Hope this helps, and good luck.

Naf

Kitten868 wrote: »

I think the most important thing is what would improve your mental state more? Having some savings growing really bolsters some, seeing my balances disappear is what encourages me. I would tackle this one challenge at a time.

I agree with this. I find that I'm best motivated to keep on top of both saving and paying down when I can see both my savings grow and my debt balances fall. I need both. I like to have some savings (I have a general pot at £20 a week, and a car pot at £10 a week) so that I don't feel like I just have to get deeper into my credit cards for unexpected costs - even though I know that it isn't as efficient a way to pay things off.

In terms of what to pay off, generally its best to make minimum payments on everything, and anything you have left should pay off the highest interest rate. However, there's still an element of mental state as some people find it much easier to manage by paying the lowest balance first as the payoff milestone for that one account is closer.

As you say you have good credit, you can look at balance transfer deals to reduce your interest payments.