Written by: Valerie Hazelrig
We’ve been taught for years by financial experts to pay off our debts before we start saving. However, in these difficult times is this still the right advice? Having money available when we need it could be a better way of realising our ambitions and taking advantage of the situation.
Should you be saving?
The first golden rule of saving is not to start if you’re paying out more on loans than you’d be earning in interest. In today’s financial climate, if you have extensive debts then you’re unlikely to be able to find an interest rate that can beat this. If this is the case, it’s probably wise to focus on clearing some of your larger debts first.
Be financially savvy
If you have debts other than a mortgage, but you want to start putting funds away either for a rainy day or a medium term goal, then you need to be financially savvy. There’s no point moving money into your savings if this is going to lead to you falling behind with debt payments.
For those who are able to take advantage of interest free credit cards and overdrafts, saving whilst having debts can be advantageous. You can build up debts on the cards and simply swap them to another lender before the promotional period expires. If you have one of these cards, it’s better financially to save rather than have a positive balance. However, this scenario only works for those with excellent credit ratings who have the option of interest free accounts.
Beware of penalties
Sometimes lenders charge penalties for repaying loans early and these can vary in their severity. In this instance, it would be wise to have extra money accruing interest in a savings account, rather than paying the penalty.
Saving For a Goal
Financial saints may point out that it’s not worth saving for anything whilst you still have debts, but this isn’t always the case. Owning a property is a long term goal that could end up earning you more in the end.
Putting off saving for a deposit until you’re debt free isn’t always the best solution. If you waited a few years until you’d paid off your debts and then started saving, it would take you considerably longer to be able to afford to buy a house. During this time the housing market may have improved and you could be forced to pay higher prices. In the end you may be worse off financially than if you’d saved and bought earlier.
Putting money aside for a goal, whether it’s a house, a car or a round the world adventure, also offers you more financial flexibility. While you’re putting money away, it’s also available in case of any emergencies, such as a household or car repair.
Keep some money available
If you’d put all your spare money into paying off your debts, it wouldn’t be accessible in such circumstances. If something unforeseen occurred, you might have to take out an additional loan or credit card to cover the cost, rather than having money instantly available in a savings account.
There’s no point in paying off your debts if you simply have to take out more to cover emergencies, which could be at far higher interest rates than your current loans. Having a savings fund provides you with more opportunities to release cash if needed.
An Added Incentive
Saving money for your dream also gives you that extra incentive to keep going. Every month you’re one step closer to realising your ambitions, which encourages you to save the money rather than have a splurge. It can also keep you motivated to pay off your debts at the same time. Once these are cleared, you’ll have additional funds to put into your savings account, allowing you to live your dream sooner.
Borrowing and saving
We all want to make our dreams a reality and sometimes we need to speculate to accumulate. Morally we all know that living debt free is the obvious solution, but there are times when we can achieve our goals quicker by borrowing and saving together.