When to save money, invest it or repay debts

When it comes to deciding whether it’s better to try to build wealth, or create future financial security for you and your family, it can be hard to know where to focus your attention and limited savings.

Should you use disposable cash to buy a property or overpay a mortgage, or should you maximise tax-free accounts to try to become an Isa millionaire? Should you pour cash into a pension, or pay off your student loan? Invest in stocks, or trade crypto?

We asked some financial experts for their views on how to take a more holistic approach to your finances and when to save, invest or repay.

Build an emergency fund before worrying about anything else

Philly Ponniah, financial coach at Philly Financial, calls it “a peace of mind fund”, a pot of cash that you can get hold of instantly.

Debt charities say that many clients in problem debt get there because of an unforeseen cost or crisis that they had no accessible savings to meet. They were forced to borrow at a high rate and then found themselves stuck in a spiral of unaffordable repayments.

Reflect on whether you have enough of a buffer to pay your way out of an unexpected situation, from an emergency plumbing job, to a sudden rise in the cost of your bills.

“Cash isn’t there to deliver maximum investment growth, it’s there to give you psychological safety and real choices so you never have to make decisions out of panic,” says Ponniah.

Bank debts are one of the biggest drains on finances

Interest rates on credit cards, overdrafts or bank loans are much higher than any return you’ll get on savings, investments or from reducing a mortgage. They will snowball if you ignore them, so clearing unsecured debts must take priority. “I’ve seen credit cards charging 26 per cent without clients even realising, so do check your interest rate.” says Ponniah.

Don’t turn down free money from your employer

Once you earn more than £10,000 with an employer you are automatically enrolled into a workplace pension where your employer must pay in at least three per cent of your earnings, if you contribute at least five per cent.

You can opt out to keep more of your salary but if you do, you will lose out on a benefit that is hard to beat — “free money” on the table, says Maike Currie, Vice President of Personal Finance at PensionBee.

Tax relief on pensions is also uniquely generous. “A basic-rate taxpayer can put £80 into a pension and have it grossed up to £100 through tax relief,” says Currie.

Overpayments on mortgages should never leave you short

If you are lucky enough to be on the property ladder in London you probably have a large mortgage.

Even modest overpayments can reduce the total interest owed each month and shorten your loan term significantly, which can make outgoings more manageable, especially if interest rates rise, says Zoe Brett, financial planner at EQ Investors, who also points out there is something satisfying about reducing debt.

But over the long term, investment markets have historically delivered returns that exceed typical mortgage rates, though this isn’t guaranteed, so the issue is nuanced, says Ryan Jackson, associate financial planning director at Rathbones, and your decision will depend on your risk tolerance, investment timeframe and mortgage rate.

James Harrison, chartered financial planner at Path Financial, says it’s important to consider liquidity — how easily you can actually get hold of money when you need it. You can’t access any equity you’ve built up in a home unless you remortgage or sell.

Student loans are like a tax

Financial advisers caution that student loans should be viewed differently from other forms of debt. Repayments are linked to earnings rather than the size of the outstanding balance, which means that though high interest rates can keep graduates stuck chipping away at outstanding loans for years, it operates more like a tax. You may never repay in full before the debt gets written off.

Jackson believes it’s not worth making extra repayments if doing so comes at the expense of building savings or contributing to a pension.

“Seeking financial advice can help ensure that money is directed to where it is likely to have the greatest impact on your overall financial wellbeing,” he says.

Cash issues are personal. How well do you respond to risk?

When clients ask Ponniah for her thoughts on whether to save, invest or pay down debt, she tells them that the most important thing to remember is that money is deeply personal. The right decision depends on your own real numbers, your career trajectory, and, a consideration not to be taken lightly, how your nervous system responds to financial risk.

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.