Redundancy: pay off debt or save lump sum?
in Redundancy & redundancy planning
9 replies 573 views
I have recently been made redundant & I would like to know if it makes more sense to use my pay out to pay off my debts, leaving me only about 1 months breathing space to find another job or if I should keep the lump sum to live off while I find alternative employment?
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I would suggest that you probably don't need to rush to pay off the debt unless its really burdensome, so probably better to hang off until you get a new job and then pay the debt?
On the other hand if the lump sum is substantial then you could make a partial payment on the debt and keep a bit more back for living expenses?
I'd be reluctant to spend my savings to pay off a debt to just leave myself 1 months breathing space unless I had some backup plan
What level of debt do you have, what sort of interest rates and is it under control e.g. debt management plan or are you just making minimum payments. If high rates then you may want to pay off a proportion or at least call each lender to make them aware of redundancy and that you need them to freeze interest. Perhaps chat to stepchange as not sure if they'll eye up the redundancy payment.
Ultimately it may be that keeping it until you find a job is sensible but I'd get the full picture first particularly if not knowing means you eat into your savings for living when you could get benefit support.
If, for example, the debt is a credit card with ~30% APR, it makes very little sense continuing to pay high interest while you leave the money in a current/easy access account paying a sliver of that. It would be for beneficial, in this example, to use the lump sum to pay off part/all of the credit card, then should the OP need additional breathing room, put spending back on the credit card.
It really depends how opressive the current debts are, and what access the OP has to credit should they need it.
Personally, I'd put 'not paying off debt and leaving the lump sum in an easy access account' near the end of the list of potential options.
We haven't even touched on the mental gymnastics our minds playing on us by seeing £XX,XXX in our current account every day...
The only time I fully have understood using ALL the redundancy pot to clear debt was with a friend who made a huge payment on to her mortgage which brought her monthly payment for the remainder down to about the same as 1 week of JSA. She was intensely frugal and had family to look to as well so that seemed a good solution for her specifically.
2023 £1 a day £54.26/365
If the OP then found himself short on cash, he could just go back to spending money on his credit card/overdraft again - at least he wouldn't be paying high interest in the interim.
But obviously this depends on what the debts are and why a blanket 'yes pay off debt' or 'no don't pay off debt' doesn't make sense without more information.