Should I Save Money or Reduce My Debts

Managing personal finances always involves a lot of thought and planning - and there are big decisions to be made at every step of the way. One of the things that people often ask, for example, is whether they should focus on saving money or reducing debts - particularly when they have both savings and debts to their names.

For example, you might have some money in a savings account, and an outstanding balance on a credit card. Does it make sense to have both - or would you be better off focusing on one at a time?

Well, it all depends on your personal circumstances, and it's well worth speaking to a trained financial advisor or support organisation, who will have the skills and experience you need to make the right decision. However, as an initial guide, some things to consider are whether you have an emergency fund to fall back on - for example, some savings to rely on if you lost your job, or the car or boiler breaks down! Usually it's suggested that this fund contains the equivalent of around 3 -6 times your regular monthly income, to provide a real safety buffer. So you may feel that it's important to have this in place for general peace of mind. However, this must be balanced with the need to reduce your debts to a manageable level. If you have a large debt problem then you should think about reducing your level of savings to say one months salary

You may also want to consider your debts and how much they are costing you. In this case, interest rates are good to look at. For example, if you have some spare savings that aren't needed for your emergency buffer, they might be in a savings account earning 4%. However, you may have an outstanding credit card debt balance at 15%. So in this case, it might make more sense to focus on paying off the expensive debt with your savings - otherwise you will pay more in interest charges, than you'll earn on savings interest.

When focusing on debts generally you might want to line them up in order of expense. For example, you might aim to clear your most expensive credit card of, say, 17% - with any additional payments you can afford - and then once that was clear you'd focus all your payments onto the next most expensive loan (of course making sure you were covering any minimum or agreed payments on any other outstanding loan or credit agreements.) And then you'd continue this process to work your way down to the cheapest loan. This approach can shave a good deal off your interest payments - and it's known as 'snowballing'.

Of course, when considering making any financial plans like this it's really important that you seek expert advice, and there's a huge range of specialist and impartial debt and finance organisations to help you make the right decision for your circumstances. The great thing about talking to the experts is that they have all the experience and knowledge of different options and products available - and they can explain it in simple terms, and cut out all the jargon! So why not take that first step now and begin the journey to sorting your financial future - there's no time like the present!