Should you save when you have debt or should you throw everything at it to pay it off faster?
When I finally decided to face my financial situation I started reading all the blogs and forums I could find. Amongst the plethora of information and tips was one recurring advice: do not save until you have paid off your debts. At first glance it makes perfect sense as the interest you pay is almost always higher than what you would get on savings, so that’s what I did at first.
However, I started seeing a couple of problems with this approach: first of all, it keeps you in a permanent state of precarity. Although I know that, whatever your income, you can get into debt for a variety of reasons, many people are on a very low wage and, when something unforseen happens, what could have been an annoyance become a real problem. What are you going to do if your cooker, your fridge or your washing machine breaks down? Going the the laundrette is quite expensive and, nowadays, not everybody has one in their neighbourhood. What about your boiler? Are you going to stay without hot water or heating until you have finished paying your debt even if you still have years to go? What about your car or bike? How are you going to get to work if, like in my case, there is no public transport?
If you are in deep financial trouble chances are that you won’t have an authorised overdraft facility and that the only loan you could get would be one of those “payday loans” with an horrendous interest rate that would only make matters worse. That’s why I decided that, against all advice, I would start building an emergency fund. I was already under enough stress and I really didn’t need to add to it.
Secondly, if I had carried on I would still be paying instead of being debt-free 4 years earlier than planned. I was lucky that the debt management company I used got my creditors to freeze the interest on the money I owed them but I know of people who negotiated themselves and got the same result. I had read that some companies would be ready to accept less money if you offered to settle with a lump sum but, as I had no access to any large amount of money, I had to save it up slowly.
So, I carried on paying the agreed sum every month and started putting every single spare penny in a saving account that would serve both an emergency fund and what I called a “freedom fund”. It took a while (read “a few years”) but I finally got there. I went through my DMP company but you can do it directly by sending a full and final settlement offer to each of your creditors. They don’t have to accept but most will give you a discount between 50% and 25%. Mine did, although 2 refused and got paid last. By doing that I saved over £4000. One thing to remember is not to send any money until you have the agreement in writing, an other is that it will not repair your credit score but for me it was not an issue as I already have a mortgage and I don’t want to take any loans.