You have a difficult decision on how to manage your money; would you save first or borrow to pay your debts? A lot of people struggle to divide the cash into savings and repayment of loans, only to find that both the pots empty way too slowly.
Your debts generally carry more interest than your savings carry – five or ten times more. The difference between a balance on a credit card and savings in the bank could be found in the cost and the benefit. A difference between the balance of a credit card at 20% interest and a savings account where the same sum of money could earn, giving you a yearly profit of 30 pounds.
This difference in number is the reason why financial professionals will tend to recommend that one should address high-interest debts first and only then proceed to start a savings cushion.
The Costs of Old Dues
The old bills are slowly eating away at your financial health every single day. Your credit score takes a hit with each missed payment.
Experian, Equifax, and TransUnion record in detail every late payment and default that you make. These credit agencies maintain very detailed records that are checked by the lenders before giving you money. Bad scores mean higher interest rates when you try to borrow. A poor rating can add thousands to your mortgage over its lifetime.
Mortgage lenders check your history thoroughly and may reject your application outright if they spot trouble. You’ll pay through the nose for the privilege even if you do get approved.
County Court Judgments (CCJs) hang around for six years. That’s half a decade where your financial options remain limited. The debt collectors don’t care about your stress levels; they just want payment. Soon, it affects everything:
- Sleep becomes difficult when money worries keep you awake
- Family meals turn into budget discussions rather than a relaxing time
- Holiday plans get postponed year after year
- Your self-worth takes a knock with each rejected application
Money problems rank among the top causes of relationship breakdown. Arguments about cash create tension at home. The worry affects your whole life; it goes from your job to the way you bring up your kids. What you owe keeps increasing, and what might have started as small amounts becomes quite large.
When Saving Makes Sense First?
There are times when putting a bit aside beats clearing debt straight away. You can build a small emergency fund. You’ll reach for credit cards when the boiler breaks or your car fails its MOT without this safety net. This creates a vicious cycle: pay off debt, face an emergency, create new debt. A small cash cushion breaks this pattern and keeps you moving forward.
The workplace pensions deserve special attention. They’re basically handing you free cash when your boss offers to match your pension payments. Most employers match between 3% and 5% of your salary. This instant 100% return beats any debt interest rate. You can keep putting in just enough to get the full match, even while tackling debts.
Some debts don’t need rush treatment. Very low-interest loans (below 5%) might not be worth targeting aggressively. The student loans work differently from other debts. They use income-based repayment, and many people never repay the full amount before it’s written off.
Consider these situations carefully:
- Your job feels shaky – a bigger emergency fund might be wise
- Your health has been poor – medical costs could pop up unexpectedly
- You’re expecting a baby or other major life change
- Your home or car needs essential maintenance soon
- Family members might need your financial support
The Right Order to Clear Dues
You can start by listing every single amount you owe. Include the interest rate and minimum monthly payment for each. This simple step often reveals surprising patterns and opportunities.
You can pay the minimum on every debt. You have two solid approaches to choose from with any extra cash. The avalanche method targets the highest interest rate first. This saves the most money.
You can pay all spare cash into this debt while maintaining minimum payments on others. It feels slow at first, but it picks up speed as each debt disappears. The snowball method works differently. You tackle the smallest debt first, regardless of interest rate. This gives quick wins and builds momentum. You choose the one that suits your personality.
You can also search for the best debt consolidation loans in the UK. This will help you clarify your debts easily, and you will be able to get these loans at low rates by putting up some collateral or bringing in a guarantor.
You can also take the payment you were making and add it to the next debt’s payment. Your debt-clearing power grows with each victory.
Try these practical steps:
- Use different colored highlighters to mark each debt category
- Set calendar alerts for payment due dates
- Track progress visually – charts on the fridge work surprisingly well
- Celebrate clearing each debt with a small, budget-friendly treat
- Tell someone about your plan
You avoid the temptation to spread extra money across all debts equally. This feels fair, but it slows down progress.
The 50-30-20 Shift for Debt Phase
The standard money split suggests using 50% of take-home pay for needs, 30% for wants, and 20% for savings. You can also shift to 50% needs, 20% wants, and 30% debt elimination.
This temporary change speeds up freedom. You can look at wants first when making cuts. Your needs are non-negotiable like rent, basic food, and transport to work. Your wants include takeaways, new clothes, and entertainment.
Try these adjustments:
- Library books and free local events replace paid entertainment
- Batch cooking reduces food costs without sacrificing quality
- Home workouts substitute for gym memberships temporarily
- Shopping for seasonal sales for necessary purchases saves cash
- Free trials and introductory offers help cut costs (just remember to cancel!)
You imagine life with no debt payments. Your whole paycheck becomes yours again.
Conclusion
You will need to make hard decisions to achieve a life of financial freedom. You can tackle debts one by one, but it can feel slow and costly.
The best debt consolidation loans in the UK might offer the breakthrough you need. These loans allow combining many payments into one reduced payment with a lower interest rate.
Your stress levels drop when five different due dates become just one. You have a view of your payoff date. This may end up saving you hundreds or even thousands of interest payments in the long run with the help of the right consolidation loan.