The general rule of thumb that is proposed by most financial experts is to plan on paying off your debts before you begin saving, because you can rarely find your savings earning higher as compared to the interests that your debts accumulate. Because of this, it just makes sense to free yourself from your present obligations so you can build your savings even faster. Now if you are tackling several debts, aim to settle the most expensive ones first, such as the following:
- Credit card and store card debts
- Catalogue shopping
- Unauthorised drafts
- Payday loans
- Home credit or doorstep loans
When Should Saving Begin?
According to experts, you can begin saving once you have accomplished the following:
- You are successful at paying off your credit card debts monthly
- You are meeting your mortgage repayments on time
- The remaining types of debts that you own don’t cost you more in interest than what you would have otherwise earned if you saved that money instead
Building the Habit
It is really important to save regularly, and ideally, you should begin saving for different purposes. For example your retirement savings is different from your holiday savings, car or mortgage savings, and other miscellaneous expenses. It would be wise to set a savings goal for each purpose and determine how much your need to save, and how long it will take you to reach your goals. It would also be easier to set up Direct Debit or a standing order to automatically send a portion of your monthly income to your savings pot. That way, you won’t accidentally forget to save or use the money elsewhere.
Setting Up Your Emergency Fund
You should also prioritise building your emergency fund, to continuously support your expenses in case things go wrong. The minimum amount you should save is equivalent to your three months of living expenses, but aim to hit about six to nine months worth. In some instances though, you may use the money in the pot to settle outstanding debts, in order to clear them more quickly, provided that you have access to other forms of emergency funding such as a credit card. If that’s the case, make sure not to use your cards in other unimportant expenses to avoid running up more debt.