Should I Pay off my Debts or Build up my Savings?

Sometimes financial decisions can be really tricky. There are lots of things that we have to weigh up and it can be tough knowing which we should be doing. Decision making is not always easy and when there are facts and figures to look at and our financial future is at stake it can be stressful too. For example. If you are trying to work out whether it is better to pay of debt or build up savings there will be arguments in both directions.

Advantages of repaying debts

Having loans can be restrictive and so paying them off can be advantageous. For example, if you are having to make regular repayments then you will be less able to afford other things. So, once you stop making those repayments you will have all that extra money that you can use to spend on whatever you wish.

Having a loan will also cost money. You will be charged interest on the loan and that means that you will be paying that cost until you repay the loan. By repaying debt you will be able to stop paying these charges and that means that you will have that money to spend on more fun things.

Any debt that you have will show up on your credit record. This means that you may be keen to minimise your debt so that your credit record improves. This might be especially important if you are looking to get a mortgage or rent a home where your credit record will be key to whether you get accepted or not.

Some people also feel pressure when they have debts. They feel stressed that they have this financial burden and they really want to be able to pay it off easily. They wish it to be cleared altogether and so if they can repay it, they will feel a lot better.

Advantages of building up savings

It can feel really good to know that you have some savings behind you. To know that you have money available if you need it, perhaps if you suddenly get an emergency and need money or you have a bill you cannot afford or things like this. Having some money to fall back on can make a big difference to this. Just knowing that you have this can give you a feeling of security.

You can also earn interest on money that you have saved. How much you earn will depend on where you put the money and interest rates are very low at the moment. However, it is still better to earn some interest than to not get any at all. You can also find some accounts that will pay more interest than others and so it can be worth doing some research and comparing them.

How to decide which is best for you

If you have debts and savings or if you have debts and want to build up savings you will need to choose whether it is better to pay off the debt or build up the savings. It is worth doing a financial calculation first. Find out how much you are paying in interest on the debt and how much you are receiving in interest on the savings. If you are paying more on the debt, then it is better financially to repay the debt rather than use the money to save up. Be careful though as some debts may have charges if you try to repay them early. Contact your lender to find out whether there is an early redemption charge as this could be a lot of money and could make the difference between whether it is cheaper to repay the loan or not.

However, the decision will not just be financial. As explained above there are other reasons why we might want to have savings or be free of debt and so those are worth considering as well. It is very much a personal decision. You will need to think about how you will feel if you have no savings and whether it will make you feel insecure. You will also need to think about how you will feel if you repay the debt, even if it works out to be expensive and whether that sense of freedom will be worth it. Also, if it improves your credit score that could be worth paying extra money for.

If you do feel you would like to repay the debt then you need to have a plan. Consider whether you can afford those extra payments and whether you will have to cut down spending elsewhere in order to do so. If you have enough savings to pay for the loan, then this is great, but you might want to have a plan to pay back into those savings so that you can make back the money that you have spent.

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