Why You Should Prioritise Paying Off Your Debt and How to Get Started
It’s an age-old question: should you prioritise saving money or paying off debt?
After all, there are strong arguments in favour of both sides.
On the one hand, it’s always good to have a spare sum of cash that you can dip into when unexpected financial situations arise or use for expected expenses in your future, such as paying for your child’s education.
On the other hand, eliminating debt means having more money to work within the coming years since you’ll no longer have to redirect your income to pay back the debt and any accrued interest.
Why should paying off debt be your top priority?
In most cases, it’s generally a better idea to pay off debt before you try to compile a significant sum of savings.
The biggest reason for this is that, in most cases, the interest you’ll earn on your debt will be significantly higher than the interest you’ll make from money put into a savings account.
In contrast, if you pay your debt off early – rather than only paying the minimum repayment on your loans each month – you’ll have more income to put into savings later on.
More than this, paying off your debt, incredibly quickly escalating high-interest debt, will reduce the stress in your life and lower your monthly expenses in the long term, improving your credit score and increasing your financial security.
Are there any exceptions?
When the loan you’re paying back is low-interest – such as the mortgage on your house – it can often be better to prioritise saving money over paying off your debt, especially if you have things in the short-term that you may need a decent amount of liquidity to fund.
This is particularly true when a penalty is associated with paying back a loan earlier than agreed.
In contrast, when repaying high-interest debt such as credit card debt, it rarely makes sense to save over paying off that debt.
So, how do you start the journey to eliminate your debt once and for all?
Paying off debt is no easy task – and can often take a long time – but what’s the best way to clear your debt as soon as possible?
Focus on your highest-interest debt first.
While some prefer to start with their smallest debt, so they can experience a small win as early as possible – or even spread out their debt repayments evenly across the different obligations they have – it makes the most sense financially to focus on your highest-interest debt first.
As time goes on, the amount you owe will soar well above what you originally borrowed, more quickly than any of your other debts.
Reduce your outgoings.
This sounds obvious – and it is – but many people struggle to accomplish this effectively.
It would help if you looked at your bank account to have an accurate idea of where your money goes each month. Consider looking down your list of transactions and making a mental note about how you can reduce your spending.
Then, you might find it helpful to create a budget outlining how much you intend to save for debt repayments each month while factoring in your everyday living costs.
Besides that, here are a few other things you can do to reduce your expenses each month:
- Shop at your local market or one of the cheaper supermarkets.
- Say ‘no’ to big-name brands – own supermarket brands usually taste the same anyway.
- Check for any subscriptions you’re paying for but aren’t using (at least not enough to warrant a monthly fee – may be that gym you signed up to in January).
- Eat out (and drink) less until your high-interest debt has been paid off.
- Check if you’re overpaying on your council tax.
- Explore different insurance options – often, insurance prices are lower for new customers.
Another significant factor influencing how much you’re able to contribute to your debt repayments each month is the size of your income.
While you might be thinking easier said than done, you can do a couple of things to boost your income without begging your boss for a promotion or a raise (although this isn’t a bad idea if you feel like you deserve it).
- Sell the things you no longer use secondhand, including clothes, jewellery, shoes, books, etc.
- Consider starting a side hustle to supplement your primary salary.
- Make sure you aren’t overpaying on your income tax.
So, suppose you’re looking to improve your financial situation long term. In that case, there’s not much better you can do than to pay off the debt you have – especially high-interest debt – as soon as possible, and by following the above tips, you’ll be well on your way to improving both your finances and your life overall this year.