How you can balance debt, saving and investing

Costs are rising faster and for longer than many of us expected, putting extra strain on household budgets. To help, personal finance expert Katie Binns has produced a guide on how best to tackle your own finances.

Britons have taken out an additional £5 billion in debt to stay afloat since the beginning of the year, according to research by Credit Karma. This follows borrowing on credit cards rising to its highest level in more than a year in November 2021 when £900 million was added to credit cards.

It’s yet further indication that we are juggling many competing priorities. Take your pick when it comes to money worries: there’s scarily high energy prices (that may be with us for the next couple of years), tax hikes, railcard increases, the cost of petrol, the price of food and rising mortgage costs.

While you may have turbo-charged your budgeting, asked for a pay rise or switched your mortgage deal (or all three) to do your best for the here and the now, looking after your future finances is equally important. 

It can be stressful, especially if you’re uncertain about how best to focus your attention. Here are some suggestions to help you decide how to approach debt, saving and investing at the same time.

Manage your debts

This is a no-brainer but the place to start. Stay on top of all your debts. This will avoid late payment fees and compounding interest charges - and protect your credit score, which you may depend on if your need for credit continues. This assumes you’re dealing with a 0% interest credit card, mortgage debt or a really low interest loan. You should absolutely prioritise paying off any expensive debt: the average APR on a credit card is a shocking 26.2%, according to data analyst Moneyfacts.

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Keep on top of housekeeping

Continue to trim your outgoings as and when you can. Given the majority of energy fixed tariffs are not cheaper right now, staying on your existing tariff might be your best bet for maintaining the lowest rate available. Look into schemes you can use to get help with your energy bills, such as the government's relief scheme providing up to £350 per household. Contact any of your service providers if you're struggling to pay your bills to find out what options are available to you.

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Consider starting emergency savings if you have run out

If your emergency savings have been decimated - and you’ve paid off an expensive debt and you're meeting your obligations on other debts - try to build some reserves. This would ideally be three to six months’ salary in cash, but £1,000 is a good start at a time when the average easy access savings account offers a paltry 0.25% interest (according to Moneyfacts) - and you can also use your credit card that you've been paying off. This will ensure that if your car requires repairs, or similar, you have options for payment and won’t have to sell any investments when the stock market is down. 

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Consider a 0% balance transfer credit card to maximise breathing space

A 0% balance transfer lets you move debt from an old credit card to a new one with 0% interest rate. Interest-free periods of over 20 months are available: NatWest and RBS currently offer fee-free 0% balance transfer credit cards to existing customers, while Santander offers a fee-free 0% balance transfer credit card to customers and non-customers alike.

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Get the maximum employer contribution to your workplace pension

The minimum auto-enrolment contribution to your workplace pension, including employee and employer contributions, as well as tax relief, is 8%. Some employers offer more but you usually need to contribute more of your salary to get the maximum from them. It’s essentially free money that can benefit from potential growth in the stock market and transform a basic pension pot into a comfortable one when you eventually give up work. 

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Weigh up investing versus paying down mortgage debt

Once your debt, retirement savings and emergency savings are in a good place, it might be time to turn your attention to your mortgage debt and investing goals, such as investing for a child’s further education.

You don’t need to salt away huge amounts to pursue these goals: free regular investing with interactive investor at £100 a month over 10 years with average returns of 5% equates to £15,499 (investment growth of £3,499).

Alternatively, using that same £100 a month to overpay a 10-year mortgage at 1.66% (Lloyds’ cheapest decade-long mortgage on record) on a £270,000 home will save you £4,566 in interest and reduce your mortgage term by one year and three months. There’s no right answer here: what you choose to do may give you peace of mind rather than a bigger financial gain.

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Weigh up investing versus adding to your savings 

Assess how robust your emergency savings need to be and consider if it’s worth adding to them when low interest rates and high inflation mean those savings are being eroded. A top easy access savings account currently pays 0.75%, while a fixed-rate account pays between 1.48% and 1.9% to lock your cash away for between one and three years respectively. Investing requires a minimum time frame of five years in order to take some investment risk and give any investments the opportunity to ride out any stock market volatility.

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