Paying off debt versus saving

RhiBi · 11 March 2018 at 11:54AM

Just looking for a little advice

We have some credit card debts that we've moved to a 0% interest rate card and are paying this off monthly. I also have a Next account which is currently at £1500, was over £2000 in January so we've made good headway with this and I hope to have it clear by August and then will be closing the account!

My question is, I could pay off a little more of this debt each month (approximately £50) but that would mean not putting anything in savings! I'm really unsure which is the best way to go!

Any advice would be great!

Thanks

sleepyjones · 11 March 2018 at 12:07PM

Are you saving for something in particular?

If it was me, I would put everything into debts, get everything paid off, close the accounts and then start saving when you're debt free, at which point you'll have no worries and you can make it up by doubling the savings contributions (ie ... if for example you were to pay off £100 per month into debts and £100 into savings ... you should just pay the £200 into debts, and then when they're clear you can start paying that £200 into savings).

More for piece of mind than anything else. It would also reflect on your credit file if you're making above the minimum payments on your debts (I think).

Put any extra money into the Next card though, over the credit card, since I assume the Next account isn't 0%.

riotlady · 11 March 2018 at 12:18PM

Do you have emergency savings? If not, I'd pay a little less on the debt and build up my emergency savings pot, otherwise if something unexpected strikes there's a good chance you'll have to take out credit again.

If you've got a little bit tucked away for an emergency, I would focus on throwing everything I could at the debt and saving once it's cleared.

sleepyjones · 11 March 2018 at 12:26PM

On the off chance that an emergency savings scenario presents itself (ie, fridge blew up?) ... then you would have the 0% card that you could use in that scenario (it's not the best but what are the chances?).

The most important thing, for me, would be to clear the Next debt, since there'll be interest to pay on that?

RhiBi · 11 March 2018 at 1:42PM

Thanks, yes there is interest on the Next account, I'm not sure of the APR, but the interest charged last month was £27.

We have a very small emergency fund, currently at £660. Whilst we're not saving for anything in particular, we do have a touring caravan so will be having breaks away in that.

I think paying the Next does need to be a priority though. Thanks for your replies

sleepyjones · 11 March 2018 at 2:03PM

If it was me, and this might be bad advice ... I would chuck the £660 you have at the Next debt, it'll save you £10 a month in interest ish, which isn't a lot but it's more than you'll be getting in interest off it. Just get it paid off ASAP, maybe delay your first caravan holiday until around July in which time you'll hopefully have paid off that Next debt (or, at least most of it). You can always use your 0% card for spending and then put everything to pay that off after your holiday. To me, it makes more sense to use credit at 0% than to "stockpile" savings whilst paying interest on something else (if that makes sense).

System · 11 March 2018 at 2:27PM

RhiBi wrote: »

Just looking for a little advice

We have some credit card debts that we've moved to a 0% interest rate card and are paying this off monthly. I also have a Next account which is currently at £1500, was over £2000 in January so we've made good headway with this and I hope to have it clear by August and then will be closing the account!

My question is, I could pay off a little more of this debt each month (approximately £50) but that would mean not putting anything in savings! I'm really unsure which is the best way to go!

Any advice would be great!

Thanks

Once you have an emergency fund built up the thing that has the highest interest rate gets the money.

So if the rate of savings you can get is higher than the interest on your borrowing, as it would be with the 0% card, your money goes into savings:

£1000
Savings is 5% a year interest - at the end of the year the £1000 balance is worth £1050
Loan is 1.5% a year interest - at the end of the year £1000 balance is £1015
Therefore you are £35 a year better off saving.

If the interest rate on the loan is higher than the interest rate on savings then your money goes on repaying the loan.

Savings is 1% a year interest - at the end of the year £1000 balance is worth £1010
Loan is 10% a year interest - at the end of the year £1000 balance costs you £1100
You are therefore £90 a year better off repaying £1000 of the loan.

It is as simple as that. In the case of multiple loans/credit cards the one with the highest interest gets the most money, minimum repayments made on the rest.

enthusiasticsaver · 11 March 2018 at 3:15PM

Next is expensive so I would prioritise paying that off but if you have no savings at all I would spend the next 6 months saving £50 a month to stop you being tempted to use a credit card in an emergency. Both are important but as next is expensive I think saving a smaller emergency fund initially is ok. After that is paid off you could prioritise saving for emergencies as the rest of the credit cards are 0%. The exception is if they are on short deals.

telemarks · 11 March 2018 at 3:25PM

MSE advice for this one is simple ... don't save, pay off debt. https://www.moneysavingexpert.com/loans/debt-help-plan

you should first try to cut the cost of your debts where you can. Then use what savings you have to pay off as much as you can - but focusing on the remaining high interest rate debts.
Thinking "surely I need my emergency cash fund"? Actually, that's old-fashioned logic. Read the guide linked below for a full explanation of why.
https://www.moneysavingexpert.com/savings/pay-off-debts

charolettepope · 11 March 2018 at 3:36PM

My advise in your case would be NEVER PUT OFF SAVING. The idea behind saving is to get into the habit of saving. How much you save is secondary. Clearing the debt to become debt free is one thing. But if you give too much importance to it, trust me, you will be clearing debt always. Sorry to say like this, but thats how nature works. What you give importance for increases. So, in your case, I suggest you just put aside atleast £10 as savings while you pay off the debt. Now as you pay off the debt, you can continue saving with more amount of money. This way you can keep the blood flowing for saving.

Paying off debt versus saving

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