Is it better to save or repay debt?

It’s well known that saving and repaying debt are both good for your finances. Both can help to protect you against financial emergencies.

But which is better? Let’s imagine you have $200 ‘spare’ per month to use, and you can either put it into a savings account or use it to ‘overpay’ on your debts. Which would be better for your finances overall?

Here’s a quick look at the benefits and drawbacks of focusing on saving or repaying debt.

Why saving more is a good idea

The more you save, the easier you should be able to deal with unexpected costs, whether that’s repairing a broken-down boiler or nursing a poorly pet. Some people take it for granted that these expenses will land them with a hefty credit card bill, but it doesn’t have to be that way. Putting money aside every month could make these costs much easier to deal with.

However…

Why overpaying debt could be a better idea

Strictly speaking, overpaying on your debts usually makes better financial sense than putting the money into savings. This is because debt normally accrues interest a lot more quickly than savings – so by repaying your debts faster, you’re reducing the amount of interest you pay over time.

Overpaying on your debts also means you’re in debt for less time. And that means less time in which you’re at risk of falling behind on those debts.

But there is a drawback to this. By using the money to repay your debts more quickly – rather than saving it up – you’ll have less money in your savings account, and therefore less protection against financial emergencies.

So what other option is there?

Saving and repaying debt

If you can afford to do so, striking a good balance between saving and repaying debt could be the best course of action. It’s true that you’d pay less overall by focusing purely on repaying debt, but you might consider that a reasonable trade-off for the extra security you’ll gain by putting some money aside for the future.

If you’re on a very tight budget, however, you might still decide it’s better that you focus on debt repayments first: once you’ve paid off your debts, you can look into putting money into savings again.

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