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Hello friends and welcome to today’s post. In the realm of personal finance, the question of whether to repay your debt or start saving and investing first often arises. This is a very valid question. We all know how important it is to start investing in order to grow our wealth, so why not start right away? While saving and investing are important, there are practical reasons why debt repayment should take precedence. In this article, we’ll explore the considerations that make paying off debt before saving and investing a smart financial move. Read to the end for practical advice to repay quickly.
Interest Costs
One of the most practical reasons to prioritise debt repayment and repay as quickly as possible, is to minimise the amount of interest paid over time. High interest debts like credit card balances, personal loans, and vehicle loans can accumulate substantial interest charges, eating into your financial resources. These high rates can quickly spiral out of control if left unchecked, making it challenging to make progress towards financial goals. Prioritising debt repayment allows you to tackle high-interest debt first, thereby reducing overall interest costs and freeing up more money for future saving and investing. By paying off your debts early, you can potentially save thousands of pounds in interest payments, which can then be redirected towards saving and investing.
Should I pay off my debt with savings?
To illustrate why it is better to pay off your debt first, let’s look at an example. Sally has £1,000 on a credit card. She also has £1,000 saved in a high interest savings account.
£1,000 debt on a credit card at 23% costs £230 in interest over a year.
£1,000 saved in a savings account at 5% earns £50 in interest over a year.
The difference in interest is quite staggering. If Sally pays off the debt with her savings, she’d be £180 a year better off and could then put the money that she was paying towards her expensive debt, into a savings or investment account without having the debt hanging over her. As you can see, having savings and debt actually costs you more in the long term!
Credit Score Improvement
Another practical benefit of paying off debt is the positive impact it has on your credit score. Timely debt repayment demonstrates financial responsibility to creditors. This can lead to a higher credit score over time. A higher credit score opens doors to better borrowing terms, including lower interest rates on future loans and credit cards. This will put you into a better position should you wish to consolidate your debt when it has gotten down to a more manageable level or you are in need of credit in the future.
It is a good idea to regularly check your credit score as you never know when you might need it. It is particularly important if you want to get a mortgage or remortgage, or even just to rent. Sign up to a service such as the Credit Club through Money Saving Expert. It is free and you get a monthly update. It only carries out a soft search so won’t affect your credit score.
Reduced Financial Stress
It will come as no surprise that debt can be a significant source of stress and anxiety for many individuals and families. The constant worry about making debt repayments can detract from other aspects of life and affect your overall well-being. By prioritising debt repayment, and having a robust plan, you can reduce financial stress and enjoy greater peace of mind knowing that your debts are under control.
Improved Cash Flow
Debt repayment improves your cash flow by freeing up more disposable income for saving and investing. As you repay your debt, you can have more money available to allocate towards your financial goals. This increased cash flow can accelerate progress towards building an emergency fund, saving for retirement, or achieving other financial milestones.
Risk Reduction
Carrying high levels of debt can expose you to financial risk, especially in times of economic uncertainty. Prioritising debt repayment reduces this risk by eliminating the burden of debt obligations. This, in turn, provides a more stable financial foundation and reduces the likelihood of experiencing financial hardship due to unforeseen circumstances.
Opportunity Cost
Every pound spent on servicing debt is a pound that could have been invested to generate returns. By prioritising debt repayment, you can avoid missing out on potential investment opportunities and maximise long-term wealth accumulation. This concept of opportunity cost underscores the importance of addressing debt obligations before focusing on saving and investing.
Avoidance of Bad Debt
Not all debt is created equal. Some types of debt can be more detrimental to financial health than others. Prioritising debt repayment ensures that you can focus on eliminating high-interest debt, such as credit card balances or payday loans. By avoiding bad debt, you can set yourself up for greater financial success in the long run.
Financial Discipline
Paying off debt requires discipline and commitment. These qualities are essential for long-term financial success. By prioritising debt repayment, you can develop the discipline and habits necessary to stick to a budget, make consistent debt payments, and avoid future debt accumulation. This financial discipline sets the stage for successful saving and investing habits in the future.
Long-Term Financial Freedom
Ultimately, the goal of paying off debt is to achieve long-term financial freedom. By eliminating debt obligations, you can gain greater control over your financial destiny. You can pave the way for a more secure and prosperous future. Everything you do towards clearing debt is setting the stage for achieving financial independence. You can then focus on building wealth rather than servicing debt.
Repay your Debt Quickly
So how can you repay your debt quickly? Create a budget that helps you to find ways to save money in other areas to put towards your debt. You then need to create a solid repayment plan. Start by listing all your debts, prioritising high-interest debts like credit cards. Cut unnecessary expenses and redirect that money towards your debt payments. Consider consolidating debts or negotiating lower interest rates. Increasing your income through side hustles or freelance work can also accelerate repayment. Get cashback for purchases that you were already making and use that money towards your debts. Try using the debt snowball or debt avalanche methods for paying back your debt. Even small amounts paid regularly will quickly add up and save you interest and help to pay back your debts faster.
In conclusion, while saving and investing are essential components of wealth-building, prioritising debt repayment offers practical benefits that cannot be overlooked. By minimising interest costs, improving cash flow and reducing financial stress, you can set yourself up to start building your wealth and working towards financial freedom.
Are you feeling bogged down with debts and desperat to start investing? Will you work at making debt repayment a priority? Tell me in the comments.
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