If there’s one positive that can be taken from the global financial crisis, it’s that more and more people seem to be thinking about how to make more of their money. Over the last year or two, various reports have indicated that many people are saving more, repaying more debt and taking more care over where and what they buy.
All of these things can help to improve your financial situation, but which is better – investing/saving or repaying debt? Should you focus more on savings and investments to increase your financial security, or should you pay off your debts first?
The answer to this depends on your circumstances. In some cases you might be able to do both, but sometimes one or the other might make more sense.
Saving / investing
Savings and investments can provide financial security by giving you something to fall back on in a financial emergency. What’s more, they can allow your money to grow faster than just keeping your money in a ‘standard’ bank account.
A lot of experts recommend keeping the equivalent of three months’ salary in savings. In truth, any amount of savings is better than nothing, but it’s a good idea to work towards this kind of savings target – to ensure you’d be able to cover your costs for a while if you lost your job, for example.
But what about your debts? If you’re focusing on saving but repaying your debts slowly, couldn’t that cause problems?
Some experts recommend repaying your debts before you save, and in one respect this makes good financial sense. By concentrating on repaying debt, you’ll almost certainly pay less interest overall, because debt usually accrues interest faster than savings.
However, by completely neglecting your savings you could be putting yourself at risk. Let’s imagine you finished clearing your debts one day but then received a huge car repair bill the next day – you could be left wishing you’d put more money into savings.
With that in mind, a lot of people only focus exclusively on repaying their debt once they already have a good amount of money in savings/investments.
Some people may simply prefer to strike a good balance. Although it might cost you more in the long run, repaying a reasonable amount towards your debts while still putting some money into savings could well provide more financial security overall than focusing on one or the other.