Should you pay off debt or start saving first?
🔸 Plus: 1.4 million workers dropped out of their workplace savings plans 🔸 The guy who won £316,000 in quiz prizes 🔸 The “buy now pay later” market has quadrupled 🔸
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Here’s today’s 2-minute guide to demystifying money and making you richer
Pay debts or start saving - which comes first?
City AM published one of the funniest front pages this year: “Abrdn: An Aplgy.”
Two-thirds of consumers say they know nothing about cryptocurrency.
MacKenzie Scott is giving away £30 billion but how she decides who gets it is a mystery.
The amazing story of Brandon Blackwell who won £316,000 in quiz prizes.
The “buy now pay later” market is expected to hit £30 billion this year.
1.4 million younger workers dropped out of their workplace savings plans.
South Carolina officials found a bank mystery account with $1.8 billion in it.
The average salary of a software developer in London is less than half of those in New York.
The markets, year to date
S&P 500: 5,204.34 ⬆️ 9.69%
FTSE 100: 7,943.47 ⬆️ 2.88%
Bitcoin: $70,599.50 ⬆️ 59.83%
GBP to USD: $1.2652 ⬇️ 0.60%
GBP to EUR: €1.1653 ⬆️ 1.06%
Should you pay off debt or start saving first?
If you’re not sure whether you should pay off your debts or start saving first, here’s a method for making that decision. There are three steps:
The golden rule: pay off debts first
Separate good debt vs bad debt
The third way: saving and paying off debt at the same time
1. Pay off debt first
The key is to compare the interest on your debts with the interest you earn by saving.
If the debt interest is set at a higher rate than your savings, it’s generally wise to pay off that debt before growing your savings.
This is especially true when it comes to short-term borrowing, like credit cards, store loyalty cards, and overdrafts. This kind of unsecured credit carries high interest rates. It's generally a good idea to pay down debt as quickly as possible.
2. Good debt vs bad debt
However, not all debts are created equal, and some don't need to be on the fast track to repayment. Good debt is the kind that might actually make you richer in the long run, like education, a home mortgage, or an investment in a professional course that will help your career.
What good debt looks like
Take a mortgage or a UK student loan, for example:
With a mortgage, you’re paying interest but unless you are already rich enough to pay off the entire thing you should treat this as a monthly expense. It’s “good debt” because you’re gaining equity in your house despite the interest payments.
With UK student loans, the government is taking a percentage of your salary based on your ability to pay. It’s not directly related to how much you owe. And all student debt is forgiven after 30 years. Education is one of the most valuable assets you can buy. It will pay you dividends, tangible and intangible, your entire life. It’s “good debt”. So unless you’re very rich, treat UK student debt like rent — it’s a monthly expense you can’t control.
What bad debt looks like
Bad debt is the stuff that drains your cash without leaving you much to show for it. This includes splurging on items that don't appreciate in value, like a car or a video game console, or using credit to cover day-to-day expenses or nights out with friends.
Credit cards, personal loans from the bank, and your bank overdraft are the worst kinds of personal debt. The interest rates are likely to be high. STOP racking up bills with these immediately.
If you can make extra payments and get rid of these debts within a year — do so. Then start saving and investing after that.
Once you've met those bad debt commitments, any leftover cash can be happily directed to saving and investing.
3. The third way: saving at the same time as paying off debt
The gold standard — the old standard — was always to get rid of bad debt first and then start saving. But times have changed. For many, debt is an unavoidable fact of life. It’s now so common for people — especially young people — to carry debt that it’s worth considering whether you should start saving at the same time as you’re focusing on debt.
Here’s why.
Every month you are not saving or investing is a month where you are losing the benefit of compounding. The longer you wait to save and invest, the less time you will have on the path to financial security.
Sure, you could spend the next year paying off your debts and then start saving. But by doing that, you’re also knocking off a year at the end of your savings period — and that final year offers you the biggest gains if your money is compounding.
Don’t forget the compounding
For example, if you saved £5,000 in an account that paid 5% interest compounded monthly, you would earn £255 in interest in the first year.
So if the interest on your debt was more than £255 in that same year, you might be tempted to pay off the debt first and then start saving. That makes sense.
But let’s say that one-year delay in your savings reduces your lifetime saving period from 20 years to 19 years. At the end of that period, something crazy happens to your money:
In year 19, you’d have £7,903 of accrued interest.
In year 20, you’d have £8,563 of accrued interest.
In the final year, the accrued interest payment is £660.
So by delaying your savings for a year, you’re losing that final — and biggest — payment.
Use this compounding calculator to run your own numbers.
Of course, you’d be an idiot to also let your debts accrue over those 20 years. You definitely want to get rid of bad debt as soon as possible!
It may be best to start saving even though you still have bad debts to pay
As compounding proves, the habit of saving is more valuable than the actual money saved.
The debt vs saving trade-off is a personal decision you need to make based on your unique circumstances.
The key test is: If your income is more than your monthly expenses, including your bad debts, and you can make more than the minimum payments on those bad debts, then start saving at the same time as you’re getting rid of the debt.
And for dessert …
City AM published one of the funniest front pages this year: “Abrdn: An Aplgy.” The asset manager’s chief investment officer complained about the “corporate bullying” the company received after changing its name from Standard Life Aberdeen in 2017. (Apparently its nickname at that time was “Stabardeen”.)
Two-thirds of consumers know nothing about cryptocurrency. Yet most think it will be important in the future, per a survey from Deutsche Bank. (Moneyin2 can help you with that.)
MacKenzie Scott (Jeff Bezos’s ex) is giving away £30 billion ($37 million) to charity. But the method she uses to decide who gets it remains a mystery.
The amazing story of Brandon Blackwell, the American student who has won £316,000 ($400,000) in quiz prizes and turned Imperial College into the dominant team on TV’s University Challenge.
The “buy now pay later” market has quadrupled since 2020 and is expected to hit £30 billion this year. Reminder: it is a very, very bad idea to use deferred payments for everyday purchases.
The number of 30-somethings who stopped contributing to their retirement plans went up by 5%. About 1.4 million younger workers dropped out of their workplace savings plan this year, according to data science firm Outra. It’s a false economy: Those workers lose out on the employer cash matches and investment gains that come with those plans.
State officials in South Carolina found a bank account with $1.8 billion in it, and no one knows how it got there. Governor Henry McMaster said, “We don’t know why it’s there, what it’s supposed to be used for, how long it’s been there – that’s a problem.”
Software developers in London are cheap: The average salary for a dev in the capital is about $63,000. The same job in New York pays £141,000, according to the Wall Street Journal. That’s why so many US companies move their tech operations to the UK.
More from Moneyin2:
The savings account with a 25% return that young people routinely ignore
Ignore financial influencers - the stats say they’re usually wrong
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Photos: Steven Tyler PJs via Flickr; Marcin Wichary via Flickr;