You’ve worked hard to reduce your outgoings. You’re doing a few hours overtime each week, perhaps you’ve even taken up a weekend job. Your finances are back on track and for the first time in a while you now have surplus income.
Now you’re faced with a tough decision – what do you do with your disposable income? Do you put it towards paying off debts or do you put it into savings?
Throughout this article we’re going to delve into the benefits and pitfalls of each of these options and offer our recommendations on which one we think is best for most.
Putting disposable income into savings
For most of us, having a decent amount of savings is the ultimate financial goal.
Savings will mean different things to different people, depending on their financial situation.
For some, it may be the first step onto the property ladder. For others, it may be a new car.
But for many of us, it’ll simply provide us with the peace of mind in the event of a financial emergency.
Perhaps our car fails it’s MOT, we’re hit with an unexpected energy bill or our pet needs some expensive surgery. Having savings or an “emergency fund” available means that we won’t need to worry about being out of pocket until our next payday.
With all that said, putting disposable income into savings seems like an attractive option. But is it wise to prioritise savings over debt?
Using disposable income to pay off debts
Having debt can be mentally exhausting, especially if you don’t feel like you have any control over it. What’s more, it can be a drain on your finances.
Personal debt in the form of short-term loans or credit cards tend to carry high interest rates. This means that interest will very quickly accrue on the outstanding balance.
Simply paying the minimum balance on credit cards or only ever making the scheduled repayment on loans can be a costly mistake.
Whilst it may feel like you’re making headway with the outstanding balance, interest is accruing at a similar rate. Subsequently, all that’s really happening is you’re clearing the interest each month and not actually denting the balance.
Making overpayments on loans or credit card will not only get you debt free quicker, but it will save you money in the long-run too.
This is why the majority of financial experts will recommend that you prioritise debt over savings.
But what if there was another option, one that could allow you to save money and prioritise debt?
Consolidating your debt and saving
Consolidating your debt using a loan will allow you to prioritise both debt and savings.
Loans are very easy to budget for as they are usually repaid in fixed amount monthly repayments.
We recommend calculating all of your outstanding debt and then applying for a loan amount that will allow you to comfortably pay it all off.
What you’re then left with is affordable monthly repayments that suits your budget, and maybe even allow you to put additional surplus income towards savings.
For example, you have £200 worth of disposable income. You take out a £3000 loan to clear your outstanding debt over a term of 30 months with monthly repayments of £150. You put the remaining £50 a month into savings.
After 2.5 years, not only are you debt free but you’ve got over £1,500 worth of savings!
Whilst we’d always recommend prioritising debt over saving, there is a way in which you can do both.
Using a loan to consolidate your debt and organise the repayments into one affordable monthly repayment, essentially allows you to do both at the same time.