Should I pay off my debts or save – or both?

How to balance debt repayments and save money

If you have money left over at the end of the month, you may be wondering how best to use it. Should you pay off your debts, or is saving a better option? You might even be considering both.

Given the low interest rates on savings at the moment, and the high rates of interest typically charged by credit card companies and other lenders, it generally makes sense to pay off your debts rather than save, but there are exceptions.

If your lender charges an early repayment fee for paying off a debt in full, for example, you should consider continuing to pay in instalments. If you decide to pay off your other debts, however, which one should you repay first?

Which debts should I pay off first?

Paying off your most expensive debts first is the logical approach to take, as you save money overall. Some people take a different approach and repay the smallest debt first, and then move on to the next one, which can provide some motivation if you have multiple debts.

If you’re repaying a credit card with a time-limited promotional rate, you should try to repay it in full to avoid being moved onto an extremely high rate. Credit card providers typically charge extortionate rates once a promotional rate has expired, so it’s also worth bearing this in mind when deciding which debts to pay off first.

Saving rather than repaying debt

As we mentioned earlier, there are exceptions to repaying debt rather than saving residual income. If you happen to enjoy a higher rate of interest on your savings, you might decide to add the money to your savings.

You may also want to build an emergency fund before paying off debt, to protect you from the effects of unexpected bills. Having to pay for repairs to your car or home, for instance, can devastate your finances.

It’s common to save three to six months’ worth of regular outgoings in case you lose your job, but any amount put aside for an emergency is useful. It reduces the need to use a credit card, and can protect you from entering a debt spiral.

Should I pay off debt and save?

Depending on how much money you have available once your priority outgoings have been paid, you might feel able to pay off your debt whilst also saving. Dividing your money in this way can offer motivation as you see your debts reducing and your savings increase.

Again, you need to consider the interest rates involved to make sure you’re not paying an extremely high rate of interest on a credit card or payday loan. Whether or not you pay off your debts or save largely depends on the type of borrowing you’ve taken out, and how much it’s costing you monthly.

Paying it off in a structured way can release money in the future to go towards your savings - once you’ve repaid a loan or credit card, for example, you can put this money in your savings account.

Scotland Debt Solutions can provide individual advice on whether to save or pay off debt. Please get in touch with our partner-led team to arrange a free, same-day meeting – we operate offices around Scotland.