Yes, yes, I know it’s boring and it’s tempting to ignore those loans, credit card and storecard bills in favour of saving loads of money for your dream house/car/wedding/other object of your desire. In fact with the typical Briton having a credit card debt of £1,747; it’s difficult not to think if everyone else is at it, why shouldn’t I..?
There are certain debts which it’s generally accepted we have to ‘live with’ (until we win the lottery anyway), like your mortgage or a manageable car loan. These aren’t too much of an issue so long as you’re meeting your payment requirements and you’re not incurring extra charges. In fact, with some of these debts you can sometimes be charged more for early repayment – always fully check those Ts & Cs and decide what works for you.
But for the likes of credit cards and overdrafts there’s a darn good reason why you should settle those debts before you start to stash the cash, a little reason called APR. APR stands for Annual Percentage Rate and is basically the interest that you’ll be charged on a loan, credit card or other form of credit. When you take out any form of loan the company must inform you of the APR that they’re looking to charge you. Go and grab some of your paperwork and see what rates you’re paying. Then grab some of the paperwork for your savings and check out your AER (Annual Equivalent Rate; basically the rate of interest a saver will receive over a year if the capital is kept in the savings account for the full year. ) Chances are your APRs are a lot higher than your AERs, so you’re likely to be paying more in interest on your debts, than your earning on your savings, which surely makes saving a pointless exercise when you’ve got debts hanging over you.
So for these kinds of debts you should try to get these in control as speedily as possible (unless you’re still enjoying a 0% interest deal – if you are make sure – you’re absolutely clear on the Ts & Cs for this to check what’s covered and what’s not; make sure you’re keeping up at least your minimum payments and be aware of when your 0% offer ends so you can either switch it or pay the debt off).
A few rules of thumb are…
1. Ensure you’ve, at least, made the minimum payment each month
2. Pay off debts with the highest APR first
3. Use the ‘leftover’ money which you (hopefully) have left over each month to pay off your debts before you start saving
4. If your debts are spiralling out of control – don’t bury your head – speak to the nice people at the CAB who should be able to help you out
On the months when I do blow the budget I use the money I’d ordinarily set aside for savings to pay off my overspend. Not only does this gradually pay off my debt but it also gives me a psychological slap across the wrist and a reminder to try harder!
Remember, just because ‘everyone else’ is overdrawn or maxed out on their credit cards doesn’t make it acceptable. They might have tickets to the latest gig and more bling than P Diddy but one thing they don’t have is the serenity of mind that if something unthinkable does happen they’ll be able to cope…made redundant or unable to work due to illness and unable to pay your way? No thank you.