Paying off debts and creating savings for yourself are both essential elements to good quality financial management. However, if you only have a limited amount of cash then how do you do both? The short answer is essentially that it’s rarely possible to find a savings rate that will give you a better deal than you will pay for your debt so if you want to maximise the cash you have then it’s better to put it towards paying off your debts first. However, the ideal situation is to get into a position where you’re debt free and you have savings so the most sensible approach is to view the two as part of the same process.
Clearing your debts
If you want to clear your debts then start by making a list of all the debts that you have. Note next to each one the rate of interest that you’re paying for each of the debts and how much you have left to pay off. The best approach is to clear the most expensive debts first, so try to work out how much each one is costing you per day and then funnel your cash in that direction.
As well as clearing your debts you can manage them better i.e. make sure that you’re paying as little interest as possible for the money that you’re borrowing. If your debts are sitting on a credit card then it might be worth looking into switching the debt to another card with either a lower interest rate or 0% on balance transfers; if you have an overdraft with a high interest rate then you might be better off switching it to a personal loan with a lower rate. The lower the interest to pay the more quickly the debt will be paid off.
The key to paying off your debts is to make sure that you’re leaving yourself with enough to live off each month after you make the repayments. It’s all very well being ambitious but if you repay too much on a monthly basis and then leave yourself short and end up having to borrow again.
Once you have straightened out your finances to the point where you’re debt free then it’s time to start focusing on savings. It’s often a good idea to start saving at exactly the point that you clear your debts and then begin paying that money straight away into your savings account. Otherwise you will get used to having the extra income and spending it rather than saving. Of course you don’t always have to wait until your debts are cleared – if you have debts that are currently interest free then it makes sense to start saving now.
The best approach to saving efficiently is to start by setting yourself a goal. This could be anything from simply putting money aside as a safety net, to saving for something specific like a deposit for a house. Once you’ve set your goal then work out the specifics of how much you need to put aside, and when, in order to reach that goal – and then all you have to do is do it!