Saving vs. repaying debts

Should I save or pay off debt?
People are always asking us, if I come into money should I save it or pay off debts?
Generally speaking this is an easy answer, pay off your debts. Let me demonstrate why with an example:
Lets say that you have:
£500 savings - earning you 2% interest (this means that you earn interest of £10)
£500 debt - incurring you interest at 17% (this means that you pay £85 in interest payments)
The equation is simple, if you paid off the debt you would save £75 in this example and it will be a similar equation in most circumstances.

There are some exceptions

  • If your debt has an exit fee / early redemption charge, then repaying it immediately with savings might be the more expensive option. If this is the case, it might be a good idea to put the money in a savings account until the interest earned offsets the exit fee or until no fee is payable.
  • If you only have debts with a very low interest rate - for example, an authorised overdraft - then you will probably earn more in a savings account than you would save by repaying your debts.
  • If you have taken out a debt consolidation loan with fixed monthly payments, lenders will not always allow you to make `overpayments`. In this case, having a separate savings account could put you in a good financial position once the debt consolidation loan has been repaid.

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