When Saving While In Debt Is A Good Idea

It usually makes sense to pay off debt before saving, but some Fools explain why they prefer to save up for emergencies and future spending.

Recently I wrote an article about saving while in debt, called Should You Save Or Pay Off Debt? I showed that, mathematically, it makes sense to pay off your debts before saving. I also showed that, usually, this even means you shouldn't save for emergencies, provided you can quickly borrow more money (e.g. on the credit card you part-cleared with the money you would have saved).

However, many debtors in our Dealing with Debt (DWD) community have written about their experiences and, for various, perfectly reasonable reasons, they have been willing to take a worse financial decision and pay a bit more in interest in return for other, non-financial gains.

Firstly, more on the maths, because I'm not satisfied I explained it simply enough in my earlier article. My mistake. One day I'll explain it again more simply, but for now here are the words of Fool Harebrained, who wrote in DWD:

"Many people on these boards (including some of my favourites) advocate keeping an Emergency Fund whilst clearing their debts. I personally don't subscribe to this idea.

"The simple fact is that while your money is sitting in an emergency savings fund, you aren't making best use of your money - unless the interest (net of tax) you earn on that savings fund is higher than the highest Annual Percentage Rate (APR) you pay on your debt.

"The same goes for any other savings you have (someone recently said they were saving for their wedding day while in debt). The more you save, and the longer you save it, while you are in debt, the more money is being lost.

"Advocates argue that the emergency savings fund is, amongst other things, a "feel good" factor. To me a feel good factor that keeps you in debt longer and makes you pay more interest only feels good if you don't really understand the maths. Just because it feels good, doesn't mean it actually IS good."

Read his full post here: Emergency Funds.

Now for the alternative views, which worked well for these debtors:

peteyperson said: "I think it comes down to comfort level really.

"I think people have to find what's comfortable for them regardless of whether it costs them a little more in the long run... If you were instead to put say £50 a month into a cash account, then you could tell yourself that you'll use the cash and just slowly replenish it over time (until the next unplanned emergency).

"That way you would not get that helpless feeling that your debts are bobbing up (you're getting somewhere) and then down (you're fall further into the debt abyss, losing hope, getting depressed and likely spending more)!"

Read the whole message here.

maggiethomas responded to Harebrained and peteyperson: "Harebrained, you are absolutely correct - keeping an emergency fund costs more than using it to pay down debt and having no emergency fund.

"Peteyperson, you are also absolutely correct - having a cash buffer increases the comfort level for some people in debt, and developing the discipline to save on a regular basis for a specific purpose (the emergency savings fund) and paying off your credit card bill each month can be very effective habits to try to develop when getting out of debt."

Read her whole message here.

BVE said: "I agree with Peteyperson but for a slightly different reason. I have run up credit card debt because I like to spend. Luckily, I can keep more than the minimum payments up but would still like to get rid of the debt. However, something always seems to crop up that I need to put on the card. The latest scenario being clothes needed for work -- which I don't budget for.

"I have an ISA savings fund of £500 which luckily for me was actually inherited rather than saved (I am hopeless saver). I have decided to keep this £500 for unbudgeted expenses to save me using the credit cards. What I have found is that I am much more likely to think about whether I really need something and be careful about what I spend if it is coming from my £500 (which inciudentally is now less than that!) as opposed to putting it on my card.

"This is why a small pot of savings works for me."

Read the full message here.

Finally, MPH80 says: "Firstly, saving makes sure I get into good habits that are going to keep me debt free when I have finally paid off my debts. Secondly, it feels good to actually pay for something and know I can afford it.

"I could put my purchases on my credit card - and have done in the past - but the feeling you get from making the payment to the credit card doesn't feel very good when you pay £600 off, only to spend £700 on your car insurance.

"This isn't about strict mathematical logic. This is more about controlling my spending, helping me budget and making me feel better about my finances."

Read the full message here.

So some people have good reasons for not sticking with the maths. Remember, it's an individual decision.

Deputy Editor's note: I have edited the messages where necessary to make them clearer. Click on the links for unedited versions.

> To learn more on getting out of debt, read our guide: How To Get Out Of Debt.
> To open an easy-access savings account see our savings centre. If you see one you like, check the More Details page to ensure there are no penalties for making withdrawals. That information will be in the 'Withdrawal Details' box.
> To learn about ISAs, go to our guide on Cash ISAs.