Should you save or pay off debt?

1) Do you have an emergency savings account?

You should aim to have three months worth of expenses stored away for any emergencies because they will happen and you need to be prepared when they do. The emergency can be as simple as an iPhone repair or could be as significant as losing your job. An emergency savings account is a top priority which is even more important than paying off debts.

2) Cost your debts by listing the amounts of all your loans and credit cards, write down the interest rate next to them and multiply the two numbers.

This is how much the loan costs you each year. If you don’t like the figure the short term pain of going without to pay off the debts will make you a much happier person than racking up more debt which will have to be paid off. The relief can be enormous.

3) Calculate the amount you earn from your savings (bar the emergency savings) by multiplying the amount by the interest rate.

Compare this figure to (2) and if it is more, then pay off the debt .You will be better off in the long term.

4) Are you expecting any additional earnings in the future which could give you more flexibility so you could pay out debts and save, such as gifts from parents or an income boost.

5) What are your future goals and do they require a lot of cash such as opening a new business or buying a new house.

If so you need to pad your savings account up as you cannot fund these goals without the necessary cash. Paying out debts will help increase future ability to pad these savings but this is dependent upon the urgency of the goals.

There is no hard and fast rule on when to save and when to pay out debts however knowing what is important to you and having the emergency savings account ready to go are points we believe are key to financial stability.