Moves to clear debt ‘should not totally exclude savings’

It is a wise move for young people to prioritise debt management, but efforts to clear debt should not be done at the expense of having no savings at all, it has been advised.

Managing director of the Debt Advice Foundation David Rodger said getting the balance between the two right is important, although at present the circumstances favour attempts to get debt free.

He explained: “With very low interest rates being paid on savings and high interest rates being charged on borrowings, common sense would tell you it’s better to pay off what you owe before starting to save.”

At the same time, however, he noted: “There is an argument for increasing savings to make sure that that you are well prepared should the worst happen.”

Mr Rodger identified the continuing threat of unemployment as one such possibility, while noting people can also benefit from having a fund available should emergencies arise, such as suddenly needing to replace a household appliance that has stopped working.

Such considerations may be taken into account by people keen to reduce what they owe, but mindful of the need to have some sort of financial safety net if possible.

The comments by Mr Rodger come in the wake of a report published this week by Unbiased.co.uk, indicating there has been a recent shift in the balance between repayment of debt and savings.

It noted that while the net £1.8 billion paid back in the first three months of 2011 continued a trend for debt reduction dating back to 2008, the figure was £0.6 billion down on the final three months of 2010 and the lowest since autumn 2009.

By contrast, the amount saved in the opening quarter of this year was £26 billion, the largest amount since the second quarter of 2009.

By Joe White