Should I save or pay off debt?

Savings are an important part of our finances. They offer security for the future and protection against financial emergencies - and therefore protection against debt.

However, that`s not to say that savings should always be your number one financial priority. If you`re in debt, repaying your debts first can often save you a lot of money in the long run, as debts tend to cost you more in the way of interest than you`ll make on your savings.

When is it more sensible to save?

So long as the rest of your finances are in order, there`s no reason why savings should not be an integral part of your finances. In fact, not having any savings at all could put you at risk of debt in the event that anything unexpected occurs.

And even if you are repaying debts, putting money into savings can still be a good idea. So long as you are having no trouble with your existing debt repayments and you have money left once all your monthly commitments have been covered, savings could provide a `safety net` for you to fall back on if you ever fall short - as most of us do from time to time.

In many ways, it`s a matter of personal choice. It depends on whether you think it`s more important to:

• have some savings to fall back on, even if it means you`re paying interest on debts, or
• get out of debt as soon as possible (by `overpaying` your debts - paying them off more rapidly than you`re expected to), even if it means you`re not saving for the future.

When is it more sensible to pay off debt?

In general, if your debts are causing you any problems, or if you are left with little money once all your commitments have been accounted for, then it`s probably a good idea to focus on your debts.

Paying off your debts before you save will usually save you money, because the interest on debt usually grows faster than your savings will. By using the money you would have saved to pay off your debts, there will be less time for the interest on your debt to grow, and therefore you are likely to pay less overall.

However, if you decide to overpay on your debts, or settle the entire debt early using savings, make sure you ask your lenders about any early repayment charges (also known as early settlement fees) that you may be expected to pay. A lot of debts won`t impose an early repayment charge, but if they do, it can add a lot to the total amount you`ll pay, so you will need to include this in your calculations.

Of course, once your debts have been cleared, you`ll be free to start saving again, without the worry of how you`re going to repay your debts.