The Ultimate Debate: Should I Save for Retirement or Pay Off Debt?

If you have ‘spare’ money on a monthly basis, putting it aside for the future is clearly a good idea.

On the other hand, if you’re in debt, it’s a good idea to use any spare money to repay those debts more quickly – or is it?

For someone who’s carrying debts and wondering about the best way to make use of their spare money, it can be quite a complicated question: should I save or pay back debt?

Before we go into this, note that we’re talking about overpaying debt (paying more than you actually have to in a particular month).

When you’re in debt, making your required payments is quite simply more important than saving for the future – failing to stick to the terms of your repayment agreement could damage your good credit score, cost you money in charges, and even lead to legal issues if your lenders think it’s necessary.

Why Should You Overpay Debt First?

The faster you repay your debt, the less you’ll pay in interest. With some forms of credit, such as credit cards, you’re only obliged to repay a small portion of your balance every month (often around 3-5%).

Do that and you’re leaving the other 95-97% there to gather interest.

If you could pay a bit more, there’d be less debt left over to accrue interest. If you could pay it all off within a month, you’d pay no interest at all on your credit card borrowing!

But of course, credit cards aren’t the only form of debt…

Why Should You Save for Retirement First?

Some debts will impose an ‘Early Repayment Charge‘ if you repay money earlier than originally agreed.

Credit cards are a good example of debts that don’t impose this kind of charge. Certain mortgages, on the other hand, can impose a substantial early repayment charge if they’re repaid early – this can easily be in the thousands of pounds, although you may well be allowed to overpay by a limited amount each month.

This is one reason you could be better off saving money now rather than using it to repay your debts more quickly, but it’s not the only one.

There’s also the question of emergencies. If you’re suddenly faced with an unexpected cost, having some savings set aside can make it so much easier to deal with.

You might argue that you could always borrow money to pay for it, but there’s no guarantee you’d be able to do that – especially at a time like this, when lenders are being so cautious about lending out money.

So it could make a lot of sense to build up a decent ‘safety net’ of savings before you start spending spare money on overpayments.

photo by thephotographymuse