Pay off debts vs saving

It's a common question on the lips of many Australian homeowners: "Should I pay off my debts or start saving?".

The answer is not simple, though getting rid of your debt could allow you to start saving seriously once you're no longer owing money on your credit card or for hire purchases.

At the same time, getting into the habit of seriously saving can be easier said than done for some couples and families. If so, getting a savings plan underway sooner rather than later can help build those essential saving skills.

You'll be a lot more prepared for retirement with the right savings plan - one option being a self managed super fund.

You can strike a balance between debt elimination and getting into the habit of saving if you adopt a few simple strategies.

Working out what you owe

The first step is to work out what you actually owe. Taking the time to work through your debts is essential.

Your home mortgage is one of the most significant debts you'll have and it's important to keep in mind, as it takes up a significant portion of your income. However, given its long-term nature, don't include it on your short- and medium-term debts to be paid off.

Not all debts will have the same interest rates or terms of payment, so it's important to note these down when you're working out your debt obligations.

One of the most effective ways to go about this is to compile a spreadsheet. First of all, list the money you owe to each lender. Note the total amount owing, the interest rate and the minimum weekly, fortnightly or monthly repayments.

From this, you can work out how long it will take you to pay off each debt, as well as to get rid of all your debts. You should take into account credit card debt, student loans, hire purchases and cash loans.

Bump up your repayments

Secondly, repeat the exercise, but bump up the repayment amounts. Don't forget to account for your home mortgage repayments as well as electricity bills, transport and grocery costs and other essential monthly spending.

If you really want to pay off your debts faster, you need to be prepared to pay a bit more.

Start snowballing

You can work on paying off your debts with the snowball method, which involves eliminating small debts first.

This works to motivate you as you see your various debts start to disappear.

Banish high-interest debts

Another option is to pay off debts depending on their interest rate. Here's where investing comes in. If you want to get saving, there's no point only making minimum repayments on hefty credit card debt that carries a high interest rate.

Your savings will be dwarfed by the fact that you've got a mounting pile of debt, with interest continuing to accumulate.

What's right for me?

If you need an incentive to pay off your debts because you find your financial situation overwhelming, the snowball method might be best for you. By doubling the payments on smaller debt, you'll get rid of them faster and can then move on to other debt.

You could be in a good position to start considering investment strategies while you pay off your debts with the snowball method. However, it's important not to let saving get in the way of getting rid of any high-interest debt.

One way you can get into the habit of saving is simpler than you think. Set up an automatic payment for $40 or $50 a week. If this goes out to a savings account as soon as your wages come in, you won't even notice it's gone.

As your savings account grows while you primarily focus on paying off your debt, you'll be motivated to start considering more intensive investment options, such as self managed super fund property.

Other helpful resources:

Refinancing tips for investment properties
A step-by-step guide to refinancing
6 factors to consider before refinancing a home loan

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