Did you clear your debts before you started saving?

[DarylDixonsHair]

Had a conversation with a friend last night and he mentioned that he's had to dip into his savings in order to keep up debt repayments. It never crossed my mind to start a savings pot while I have outstanding debts. I have a few overdrafts, store cards and credit card but nothing huge like a mortgage or car loan.

I always thought I should pay off everything and start at zero before putting into savings. I'm on a low income, so it will take years before my debts are clear but I am making slow progress. Have I been a financial idiot all this time?

[Saltystraw]

I would always pay of any debts first unless it’s a mortgage. Then I would have savings in an offset account in case I needed access to funds.

[Waxonwaxoff0]

I think it's important to have some savings in case of an emergency. I don't have debt any more but when I did I always had savings alongside it.

[homemadecommunistrussia]

Ýes, of course with the exception of mortgages and student loans.

[ememem84]

I always had a small savings pot when I had loads of debt. But threw most of my money at the credit cards etc.

Now I’m debt free - aside from mortgage and a minimal monthly credit card debt I throw most money at savings.

[Pollyputthepizzaon]

Always pay off debt first. Debt is so expensive.

[Kez200]

I had a mortgage and small car HP whilst saving. There was a time people borrowed cheap (credit card deals I think) and got a decent savings rate on their money - a long time ago now!

It wouldn't be the best advice now but could still make sense if the rate was low and the savings pot gave a lot more flexibility.

[IsolatedIzzy]

Martin Lewis advises a pot of money for emergencies even when you're clearing debts. I think it also depends what interest rates you're paying on the debt.

[Themostwonderfultimeoftheyear]

We have a small emergency pot of savings but the vast majority of our spare money goes on the debt. Want it gone as soon as possible!

[BarbaraofSeville]

You should aim to pay the least interest possible on your debts, because that means that they will be paid off faster.

If your debt is interest free, then it's OK to save, but it's silly to save while paying a higher interest rate on your debts. After all, if you had a genuine emergency, ie not just fancying a takeaway or some new shoes when you already have suitable ones, you could use your credit card.

But there are often a lot of other factors at play and sometimes plugging away for years on 'a few overdrafts, store cards and credit cards' while on a low income is not the way to go, and you might need to look at a more formal solution. Have a look at:

www.moneysavingexpert.com/loans/debt-help-plan/

[milkysmum]

www.daveramsey.com/dave-ramsey-7-baby-steps
I came across this method of getting out of debt and it makes a lot of sense.
You first make sure you have £1000 emergency fund and then you use the snowball method to start clearing the rest of your debt.

[libertine80]

I've done both - saved and consolidated my debits.

Two years ago I consolidated all my debt from overdrafts, credit cards etc into a 0% interest balance transfer credit card. I then paid more than the minimum (a bad habit in the past) but I haven't particularly been paying attention to it. I also saved £300 a month. Yesterday I thought I would look at it as the interest rate is due to go up in July. I was very pleased to discover that the balance is only £600 which I can easily cover with my savings.

So I've gone from being permanently overdrawn with some historic credit card debit dating back years, to being debit free with savings in two years. I should point out that I did have a change in my working situation - going from part time to full time to achieve this (my outgoings staying the same).

[Disfordarkchocolate]

I know you should pay of debts first but we didn't. It was motivating to see savings start to build up. We even had a spreadsheet with graphs. The savings then can be used for emergencies so you don't get into more debt when be have an unexpected bill.

[Flynn999]

Does it not depend on the size of the debt vs the savings? If you have say 20k in savings and a credit card with 1k balance on zero% it maybe doesn’t make sense to pay it off. The idea of paying off a fixed amount can help keep your score healthy. If you have 30k in savings but a 3k credit card with 20% interest it probably makes sense to pay the card off (potentially using the savings to achieve this)

However for some people the reason they get into debt is the lack of savings, so the washing machine breaks, don’t have savings so a new one goes on the card. The car breaks down leaving a bill of 200, can’t put off fixing it so onto the card. Don’t have the money to pay it off in full so the interest knocks the bill up. Then your left with even less spare cash because your paying of the car and the washing machine. You then end up with a window broken in the house. Can’t really leave it and you either go through the insurance with a £150 excess or just get it fixed, whichever option you do, you don’t have the cash, so that goes on the card. The monthly bill has again increased, so that 1300 a month or whatever your earning isn’t going as far as it used it. You’ve then started to reach the maximum of your card and this has affected your card, so your not eligible for a better rate card. So your stuck paying the minimum balance each month,

I’ve ended up with a bad credit card and whilst I’m paying it off, I’m also putting a small amount into savings so I have a safety net and can try and break that cycle of using the card every month. It’s only £30 a month, BUT it means that if I need some cash I at least can spend it. Not everyone have thousands in savings.

[DarylDixonsHair]

@libertine80 How do you consolidate different debts together like that? Is it possible with a poor credit rating? I'm scared to apply for balance transfer credit cards in case I get turned down and wreck my credit rating even further.

[milkysmum]

If you can't consolidate I would honestly go with the snowball ball method, you pay minimum payments only on everything but the smallest debt and then hit that one with every bit of spare cash you have- before you know it that one will be cleared quickly, then you move to the next one and then the next one in order, its psychologically satisfying seeing them getting knocked off so it keeps you motivated. I'm on my last one now and it's a great feeling!

[TheClitterati]

I have savings. And some non mortgage debt on a zero rate credit card. Every month I pay the card and I save some money. I could pay the card out of savings, but I'd rather be building up savings.

If I had debt with interest I would focus more on clearing the debt. But as others said it's always good to have some savings for emergencies.

I try and have different savings accounts - one for big bills - like car repairs etc. So I don't have to use credit. These savings go up and down once they're depleted I build them back up. Then I have longer term savings for holidays and things like that. And then I have even longer term savings which I try not to touch it all.

[nasalspray]

I would presume he means due to Covid affecting his financial circumstances, in which case having manageable debts (using credit card, perhaps loan repayments) whilst also having savings - for emergencies just like this is a good idea.

In fact he is probably a perfect example of why people should save a bit. Having debt isn't altogether terrible. It's how some people pay for large ticket items and with an affordable monthly payment it makes sense to have some savings going on too.

[Temple29]

I always save alongside paying off debts. More so to have something to fall back on. Every now and then I use the savings to lump off the debt but still keep a bit. Thankfully don’t have much debt but it would make me nervous to not have savings too.

[Firstimemam]

We have the mortgage, a car loan and both our student loans but wouldn't choose to pay anything off from our savings. We don't have credit card debt, I'm not sure what I would do if I had that.

[peperethecat]

I think it depends on the size and type of the debt. If it's a payday loan or a credit card you're paying interest on or a commercial loan which you can pay off quicker by making overpayments then yes, I would prioritise paying off the debt over building up savings (although you should always have a certain minimum amount of cash available if possible).

If it's a mortgage or a student loan then no, I would prioritise saving unless I already had such a substantial amount of savings not really making any money that it made sense to pay down the debt faster.

I also used to take out credit cards with a long interest free period (e.g. 18 months or two years) and put all my spending on those whilst saving into a high interest account. But you have to be very disciplined if you choose to do that and not touch the savings so that you can pay off the credit card as soon as the interest free period is over, and it's not so much worth doing these days when interest rates are at rock bottom.

[peperethecat]

In your case OP I would see if you could get a balance transfer onto a lower interest card or even one with an interest free period. Some lenders may be able to do a "soft search" to check whether you meet their lending criteria so it doesn't leave a mark on your credit record before they make a decision.

Store cards and credit cards often have high interest rates so your priority should be to try and reduce the interest you're paying if at all possible. If you can't do that then work out which of your debts has the highest interest rate and chuck as much money as you can at that one each month whilst making the minimum repayments on the others. And maybe see if the lowest interest one will accept a balance transfer from the higher interest ones.

[Dk20]

I have a car loan, about 4k left one it which will be repaid by this time next year.
I also have about 4k in personal savings in my current account (our joint savings are separate and are not touched) and would rather keep it there and pay off my car loan monthly rather than paying back the loan and going back to 0 savings.

[onemouseplace]

I would try and build a small savings pot for emergencies. While in theory, if an emergency came along you could just use an overdraft/ credit card to cover it and set back your repayments, I think the psychological benefit of using savings rather than cracking and using debt again is worth it.

[youresodesperatetobedifferent]

We’re doing a bit of both. Hammering our credit card to get it paid off by the end of the year and saving towards many of next years expenses AND saving towards our wedding.

Looking forward to the card being paid off then being able to save for emergencies.

[1990shopefulftm]

We have a 2k emergency fund whilst paying off loans to be sure if something goes wrong that we don't have to get into anymore debt because of it. If you have a big amount of savings then yes you should focus on the debt but make sure to have a safety net first unless you re talking about a payday loan or something equally high interest