Richard Lane, Director of External Affairs at StepChange, provides some essential tips about managing debt and how to start building a rainy-day fund.

If you’re in debt or living on a tight budget, saving money can be really tough, particularly at a time when prices for everyday goods and services are so high. But there’s real value in having a rainy-day fund; we’ve all experienced that out-of-the-blue expense that derails all the careful budgeting we’ve done that month. Without that safety net, you need to cut back or even borrow to cover the costs, leaving you more vulnerable to future unexpected expenses.

Saving isn’t always possible and sometimes it’s not advisable if you’ve got expensive or pressing debts that need attention first. But, if you do find yourself with some money left over after you’ve paid all your outgoings for the month, what are the rules of thumb for when to save and when to pay towards your debts?

First off, the easy bit – if you’ve got an emergency fund of at least three months’ pay in place already, you should be doing all you can to clear your debts, particularly if they’re incurring interest.

According to the Bank of England’s latest Money and Credit statistics, the average credit card APR is more than 20% and the average interest rate on a personal loan is more than eight percent. Unless you’ve got a hot stock market tip, it’s unlikely your money is going to work harder for you in a savings account than it is paying off what you owe. Pay towards the debt with the highest rate of interest first, then work through the rest.

Priority and Non-Priority Debts

At the other end of the spectrum, if you have any ‘priority debts’, these should always be addressed before saving money and paying off other types of debt such as credit cards. Priority debts can include your mortgage, rent, council tax, energy bills, among others, and the consequences of missing these payments can be serious, therefore they should always be paid off first.

Next up, if you have multiple non-priority debts – think credit cards, personal loans, overdrafts - and aren’t sure whether you’re in a position to start saving money, an important first step is to create a budget. This will help you to get a clear picture of your income and outgoings, and how much money you may have leftover each month to cover debt repayments or potential savings.

When and how to save

Once you’ve got that straight, it’s a case of looking at what you owe and how much it’s costing you. Due to the high interest fees that come with many credit products, in most cases, it does make financial sense to pay toward your existing debts before saving money. However, we all know those unexpected expenses do happen, and resorting to credit to cover the costs can do more harm than good. So, provided you’re able to meet all your contractual debt payments, putting aside a little extra as a savings buffer can be a sensible move.

One way to do this is to take advantage of the Government’s Help to Save Scheme, which the Chancellor extended for a further 18 months in last week’s budget. Help to Save is a government-backed savings account, designed to help those on low incomes to save money by boosting their savings by adding 50p for every £1 saved. You can find out more about the scheme, alongside other saving tips, on the StepChange website.

Getting Support

Knowing where to find information about debts and your finances is vital, particularly at such a difficult time for so many people. This week marks our annual Debt Awareness Week and this year we’re seeking to increase understanding of how debt advice works and how it can help people struggling with their finances. New polling we’ve commissioned shows that one in six (16%) people do not know debt advice services even exist, and a further one in five (21%) wrongly believe that contacting a debt advice organisation would have a negative impact on their credit score.

Depending on how much debt you have you may be eligible for additional help, such as the Breathing Space scheme that will freeze your interest and any charges or debt collection activity your creditors might take while you get a plan in place to address your debt.

While the tips we’ve given may be useful, ultimately, if you find you’re having difficulty repaying your debts, if you’d like some advice on budgeting or prioritising your bills, or just some advice to understand your options even if you don’t need help right now, then don’t wait -  free, independent advice from a charity like StepChange is available.  You’ll only know what help is available if you take that first step to reach out.

The views, opinions and positions expressed within guest blogs are those of the authors and do not necessarily represent those of the BSA.