Debts v Savings - where's the balance?

[Changedmyname1357]

I know the advice is to pay off debts before building up savings, but where's the line?

I want to start properly saving while we're also in the process of paying off a low-interest personal loan. Once that's paid off, we'll be debt-free. I just can't see the sense in overpaying the loan but having no savings, therefore making it more likely that we'll have to borrow money again to cover unforeseen costs (which are very likely to occur, given that our house needs a lot of work and we drive a 14 year old car).

But am I missing something?

I should clarify: we'll be free of unsecured debt. We've just bought our first house with a 200K mortgage, so very much NOT debt-free!

The interest rate? If you can overpay it and get it off fast then do it if you think your car will need input soon then save

I see no rush if 0% interest- otherwise overpay every month to clear quickly.

I think your approach sounds sensible given you think you may otherwise end up need to borrow again but it depends what the interest rates would be - if your car broke and you could use a 0% card to pay for the repairs then it might make sense to pay off the interest-bearing debt instead of saving. If you’d be looking at an expensive overdraft or payday loan then the savings would make a lot more sense. Most credit scoring companies give you an idea of what sort of deals you might get accepted for and I think Capital
One might do a sort of pre-acceptance as well, if you want to get an idea of that.

It's 4% interest - repayments are £200pm for three years.

Our car will definitely need to have money spent on it in the foreseeable future, if not need replacing. We also have maintainance work to do on our house, just small amount here and there but it quickly adds up. I can see that saving for a lavish holiday would be daft while trying to clear debts, but it was the lack of savings that got us into debt in the first place!

If you overpay the loan you will pay less interest.
If you put the same money in savings you will make less interest.
Therefore paying off the loan more quickly makes more sense as it saves you money.

If you're likely to need to spend more money before you have it saved, it only makes more sense to prioritise savings, if you think you wouldn't get a loan/credit card at he same low rate of interest.

See this: www.moneysavingexpert.com/savings/pay-off-debts/

If I were you I would:

1. Save up three months essential expenses. So mortgage, essential bills, childcare etc. whilst saving up, just pay the minimum on the loan.

So say you spend £2,000 per month, you'd save £6,000.

1. Pay off the debt. As much as you can each month. If you have an emergency during this time you'll have your 3 months expenses to fall back on.

This is a version of Dave ramseys baby steps- google it, it's a pretty good system.

@D0lphine that is brilliant advice, thank you! And I'll take a look at Dave Ramsey

I don't have a savings goal in mind, but I am absolutely determined not to get into debt again so I need a healthy balance on our savings account in order to avoid it.

Thanks!

This YouTuber explains it well, and she is v inspirational (well I think so!)

I'm not enjoying having just reached the end of a 0% period on one card, i had saved £800 at £50 a month, and had to use it all, then transfer the remaining £500 balance to a new 15 month card. Having nothing in my savings account feels quite scary right now, especially with 3 active credit cards, but should have one of those paid off by end of year, and the cost of living payments being paid to ESA claimants should clear another, leaving just the £500, so more than doable, but scary still.

Thanks for posting OP and useful replies

My 0% balance transfer is finishing at the end of this month

I've had it for almost 30 months so not exactly a surprise it would be coming to an end!

The balance is £2k and I'm wondering if I should just use savings to pay off- the 2k payment would take half of my savings so I'm uncertain if this is right move

Also thought about getting a new transfer card but I don't really want to pay another fee and a part of me would like to just pay off & cancel this BT credit card

Have another CC for daily spending (get points) and pay off in full each month

Also another issue is our mortgage fixed rate ends in September!

We are in the process of trying to move (our place is under offer but we just cannot find somewhere affordable to move to!)

We don't want to get locked into another fixed rate but being on the variable makes me v worried, with interest rates shooting up etc

Should I just go for it & pay off the card? Even if this would leave me with only half my savings....something in me just wants to clear this debt but I'm not sure if it's the wisest decision right now