Savings vs debt repayment

[rhij86]

Hi all

So I currently have no savings. Not even £1.
From Feb I'll have quite a large amount of disposable income. I will set a small amount aside for treats etc for the family, but then will be focusing on clearing my debts down. I also want to start saving (emergency savings, H2B ISA), my question is how would you split what is left between debts and savings? 50/50? 75/25? etc etc.

TIA

I know the sensible answer in very basic form is to compare the % interest you are paying on debt with the % interest you could gain on savings and go with the larger of the two to be better off over the long term.

HOWEVER I prefer the peace of mind of knowing I have savings rather than having to take out more credit to get myself out of a hole/unexpected event so tend to go 50/50.

If you had a debt at a ridiculous interest rate though it would be sensible to kick that to the curb before saving any significant amounts .

It would really depend on when the debts are due to be paid back/how big they are/what interest rates they’re on.

Assuming you’re paying interest (particularly significant %) on them, I’d pay the debts off ASAP, then save, as you’ll not gain interest on savings at the same rate you’ll lose interest via a debt.

In a very simplistic way of looking at it, if you have a debt then really you can’t have savings because they balance each other out.

However from the perspective of benefit vs risk, if you are currently managing the required debt repayment each month, it may be worth having some savings that will cover you if something goes wrong. Ie washer needs replacing. Otherwise you could just put yourself back/further into debt

Think of unused credit card allowance as "reverse savings"
so clear down debt (use the standing order trick invented by TalkinPeace)

eg if your card limit is £4000 but the balance is only £3000 you have £1000 of emergency leeway

once you have cleared all overdraft and card debt, THEN set up savings while you pay down bigger borrowing like mortgage

but earning 0.05% on savings while paying 24% on card debt is madness

I would have £1000 or so as a starter emergency fund and then put all the rest towards the debt until you are debt free excluding a mortgage (if you have one). Then build up the starter emergency fund to being 3 to 6 months of expenses... and then start to invest (stocks & shares ISA, pension etc).

There are some podcasts/videos about this method:
Meaningfulmoney.tv
DaveRamseyShow.com

Well done for getting a higher income from February... use it to get rid of the consumer debt as fast as you can.