Pay off or Save? If we have credit card/loan/mortgage debt, are we better off paying as much off this as we can or splitting our budget between saving and paying off? Or, should we pay the minimum and save as much as we can? Finance Expert, Anthony Bell tells us the best practices.
by Anthony Bell www.bellpartners.com
When considering what to do with your money you need to know all the facts and work out which financial decision will have the maximum positive impact for you and your finances.
You can choose to;
1. Pay of Debt and/or
2. Increase your savings
Paying off Debt
Before you start sending money everywhere and anywhere, you need to find out;
1. Who you owe money to
2. How much you owe to that person or institution
3. How much interest you pay per annum and
4. Are they any additional monthly costs related to that loan on top of the interest that you are already paying?
Once you establish these four things, you then have the right information to work out which item you should pay off first and how much you will have to pay off.
If you do not have the option to consolidate the loans into one loan at a lower rate then look at paying the loan that is costing you the most to keep. Once that loan is paid off, move to the next loan that has the highest rate and pay this loan until they are all paid.
Increase your Savings
If you do not have any debt then increasing your savings is the best option for you. There is no point in keeping your money ‘under the mattress’ where it can’t earn you interest. If you intend to start a savings plan have a look at the products out there. You want to get an account that offers you the highest interest rate with the lowest monthly costs. This will ensure your money is working most efficiently for you.
Another option that many people consider is a mixture of saving money and paying off debt. When you are considering this option you need to ensure that the return on the money you are saving exceeds the interest you have to pay on your debt. For example, if you are putting money in a savings account which earns you interest at a rate of 6% but at the same time are paying interest on your credit card at 20% you are definitely out of pocket. This is because the interest that you are paying on your credit card far exceeds the interest you are making on your savings account.
Also remember you will be paying tax on the interest you earn. Pay off your credit card first before you start saving.
In the long run in order to avoid being in a situation where you have debts which are out of control, make sure you have an accurate current budget that you are adhering to. Otherwise you will be getting into financial distress if you continue to spend beyond your means.
If you need help preparing a budget and organising your finances the best person to speak to is your accountant and financial advisor.