Save or pay your debts - which is best?

With inflation so high and savings rates dismally low, it's pretty hard to find a savings account which is actually going to give you any kind of return for your money or even keep up with inflation. In effect that means you are losing money over time as your spending power is eroded.

It might surprise you to know though, that if you have debts to pay off you're likely to be better off by paying them than putting the money in a savings account.

Paying off your mortgage

If you consider mortgage repayments in comparison with savings accounts, the results are eye-opening.

An average mortgage rate at the moment is between 3.5 and 4 percent. That means that every £100 of your mortgage is costing you between £3.50 and £4 each year. So if you've borrowed £60,000 - you're paying between £2100 and £2400 a year in interest.

Conversely, if you put that £100 a month into a savings account - the average rate for a easy access savings account being 1 percent - it would be making you about 80p (after tax).

Which means that in the long run, you'll be saving money by paying off debts instead of saving the money. Of course you should check whether there is penalty charge for early repayments with your mortgage provider - this might not make it worth your while. But if there is not, putting more money into paying off bigger chunks your mortgage will leave you better off.

Paying off your credit card debt

Similarly if you consider your credit card debt, you will still be saving money by paying it off rather than putting the money in a savings account.

The average credit card APR is about 18 percent, so if you have £500 on your credit credit card, and pay back only the minimum each month (2.5 percent) you'll pay an extra £477 in interest.

Put that £500 in a savings account paying 3 percent instead of throwing it at your debts and you'll get about £12 a year after tax. So putting your debts first could save you £465!

Snowballing your debts

Remember that the most efficient way to pay off your debts is to 'snowball' them. That is choose the debt with the highest rate of interest (rather than the largest amount of money) and focus on paying that off first.
Of course you should only consider this option if you do have some savings. Don't start paying off your debts unless you have a bit of money put aside for a rainy day.

Spending habits: Would you prefer to save or pay your debts?

Save all the way!	48 (9.1%)
Pay my debts - then the money is really mine.	477 (90.9