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Should you save or pay off your debt?

Finance & Money

Posted on Thursday, July 2, 2020

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Wondering whether you should pay off your debt or concentrate on saving? It all depends on your financial situation. Wiping out debt before saving isn’t the right choice for everyone. And the same goes for saving rather than paying off debt. So what should you do?


Here’s how to manage your debt and savings in a way that suits your pocket.

 

Saving without paying off debt


If you save first and don’t pay towards your debt, you could pay more money over time in interest charges. For instance, as credit card interest rates are often higher than savings account interest rates, you could end up spending more on debt interest than you could have earned on a savings investment.

If you prioritise saving over paying off debt, you may enter retirement with debt. This means you may have to live on a strict budget during a time when you should be living comfortably.

 

When should you prioritise saving?


Prioritising saving is beneficial as it ensures you will have enough money to cover unexpected costs, keeping you out of the debt cycle. You should consider prioritising saving:

  • If you have a credit card or other debt with a very low interest rate because, with a lower interest rate, you can earn more by putting money into a savings account.
  • If you have a retirement savings plan where your employer contributes to your savings.
  • If you don’t have any savings or an emergency fund.

Paying off debt and skipping savings


Unexpected expenses are often looming. If you have no savings to fall back on during an emergency, you’ll have to use credit instead, racking up more debt. Using credit to fund emergencies only makes it harder to pay off debt.

 

When should you prioritise paying off debt?

  • If you have high-interest debt.
    Byreducing the balance you owe, you’ll also reduce the amount of interest you need to pay each month.
  • If you are struggling to keep up with your instalments and monthly expenses.

 

The more you struggle to cover your monthly expenses, the more debt you could rack up, as you may use credit to fill the financial gap.

 

Which is the best approach?


There is no one-size-fits-all approach when it comes to finances, but the best solution is to find a balance between saving and paying off debt that works for you.

For example, if you have an extra R2,000 per month, you could put R1,000 towards debt and the other R1,000 in your savings account. You can decide how to apportion these amounts based on how much debt you have.

It’s important to remember that saving and paying off debt work hand in hand. For instance, having savings to cover unexpected costs could help keep you out of the debt cycle.

 

What should you do if you’re swimming in debt?


Speak to a financial or debt adviser who will be able to help you develop a plan that suits your budget. Get started with these tips for shedding bad debt and saving:

  • List how much you owe and the interest you’re paying, as well as your monthly expenses. Include all of this in your budget.
  • Prioritise bigger debts, such as your bond and vehicle payments.
  • Don’t spend more than you earn – and a good rule of thumb is: if you don’t have the cash to buy it, then don’t buy it.
  • Find ways to make more money, such as taking on a side gig or investing your savings.
  • Trim expenses where possible (e.g. buying coffee only twice a week and cooking at home instead of buying takeaways) and use that extra money to pay off debts and save.

The information in this article is for information purposes only and does not constitute professional advice.