If you’re not sure whether you should save or repay debts, read our tipson when to prioritise debt over saving and the difference between good debt and bad debt.
When to prioritise debt over savings
Look at how much interest you’ll be charged on debt versus how much interest you’ll earn through saving.
If the interest charged is greater than the interest you earn, it might be a good idea to put money towards repaying debt before building your savings.
It’s typically best to clear debt from short-term borrowing options likecredit cards, store cards, andoverdraftsas quickly as you can.
Also, consider what funds you have available in case of an emergency. Ideally, you should have anemergency savings fundthat can cover at least 3 months’ worth of living expenses.
But until then, having the balance available through a credit card can, at least, help put your mind at ease and bring you closer to managing your finances.
When to prioritise savings over debt
Some debts don’t need to be paid off straight away. For example, with a mortgage orpersonal loan,you’re likely to have an agreement with your bank about how much you repay a month.
Once you’ve covered those repayments, any extra funds can go into your savings.
If you don’t have anything specific to save for, you may want to build an emergency fund.
Once you have an emergency fund, consider what’s important to you. You may want to:
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Make overpayments on your mortgage or personal loan (check if there’s a charge to do this)
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Consider investing for the long term
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Add money to your pension to take advantage of tax allowances
Good debt vs bad debt
As well as knowing when to repay debt and when to save, being a savvy borrower means knowing the difference between types of debt. You may have heard people speak about good debt and bad debt.
Good debt may help you become better off over the longer term.
It could be for:
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Education
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Buying a home
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Buying something that helps you earn an income
Bad debt can cost you a lot of money and not leave you financially better off.
It could be for:
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Items that won’t grow in value, like a holiday or car
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Paying bills, or covering everyday expenses
Remember, not all long-term borrowing is good, and not all short-term borrowing is bad. For example, if you use your credit card but repay it in full each month – you might not be charged any interest, depending on the types of transactions you make.
Or, if you have a big mortgage and you’re struggling to meet other costs, it’s not necessarily ‘good debt’.
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