Save vs. Repay – Which comes first?
Should you save now and repay later? Or should you repay now and save later? Balancing your finances in this way is a difficult decision – and the likeliness is you’re actually choosing wrong. Ingrained in to British culture is the ‘rainy day fund’. This is the idea of continually putting some cash aside in case of an emergency. This logic works fine, as long as you don’t have repayments to make. We are here to tell you that you should definitely repay first before you save. This may seem controversial, but here are the reasons why.
We recommend that you pay off your debts with your savings. It may be hard to watch all that hard earned in your sensible savings account suddenly fly out, but we promise it’s for the best. This is predominantly based on the logic that debts usually cost more in interest than savings earn in interest. By cancelling your repayments out you will eventually be better off.
Banks make their profit from borrowing interest rates. This is why it’ll always cost more to borrow than you can earn from the savings rate. It is common for people to have both a borrowings and savings account, often with the same bank. This is a bad financing decision as effectively the bank is lending you back the money you lent it, but charging much more to have it.
For anyone with expensive debts, especially on credit cards, using your savings to pay off your debts is a must. Once you’ve done so you shouldn’t cut up the credit card. By keeping the credit available you can use that in the case of a substantial emergency.
Are you still not sure? Think about it like this. Say you do have an emergency and you use your emergency fund to pay it off. Now you have no savings and you have to borrow more money on your credit cards at a higher interest rate.
You are no better off using your emergency fund to pay for an emergency. The outcome is the same as if you keep both a debt and savings account open.
You should get rid of your most expensive debts first by using your savings. More often than not people have more debts than savings, so you will still be in debt. Although eliminating the most expensive debts means you will only have to worry about paying off the cheaper ones with your pay checks. This will massively reduce your costs altogether and free up extra cash for you in the long run.
Whether it’s to pay bank loans or council tax debts using your savings to pay off your debts is the way forward. If your savings aren’t enough to pay off your council tax debt then CTAS are here to help. We can provide you with free and independent debt advice. Call us today to speak to one of our friendly advisors.