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Save? Or pay off debt?

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Getting into a savings habit is important, but so is making sure that you can manage any high interest debts you have.

In purely financial terms, deciding whether to pay off a debt, or to start saving regularly, is clear cut:

If you're paying more interest on your loan or debt than you're earning on your savings, it makes sense to pay off the debt first.

For example, if you have savings in an account earning 2% interest, and you have store card debt that you're paying 19% interest on, it makes more sense to pay off the store card debt first, and then start adding money to your savings account. 

However, this isn’t a rule that applies to every situation. For example, mortgages, and certain loans, have fixed repayment terms that are not negotiable. If possible, you should try and build up savings in addition to making those payments. 

There are 3 key things to consider:

  1. Interest rate
    If you have high interest debt, such as payday loans and store cards, these should usually be your number one priority. If you have several debts, it's typically best to prioritise the ones charging the highest interest rates first. If you owe money on several credit cards, you could also consider a balance transfer to simplify things and save money.
  2. Unexpected costs
    It may be sensible to build up an emergency savings fund, to cover unexpected costs, before focusing on paying down other debt.
  3. Early repayments and break fees
    Certain types of borrowing come with penalties or fees if you pay them back early. You should check the terms of any borrowing carefully before opting for an early repayment. Then do your calculations to see how much it could cost or save you.

A blended approach might be a good approach

With this strategy you could tackle high interest debt first, like store cards and payday loans. Then you could make a plan to pay off lower-interest, longer-term debts while you:

  • build an emergency savings fund to meet unexpected costs like home repairs or losing your job
  • get into a savings habit by putting a regular amount each month into a savings account
  • plan longer term savings to meet your financial goals

We've got even more tips on how to build up your savings.

Ready to start saving?

Check out some of our savings accounts and see if there's one that's right for you.

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