It seems that since the credit crunch took hold and the banks curbed their enthusiasm for lending, there has been a misconception amongst financial institutions that people are now in a position to open savings accounts.
Whereas the media was once awash with adverts for loans and credit cards it now only offers insights into the best investment vehicles for our money.
This new tactic could potentially lead to people having a false impression of their financial situation and could also lead to the banks making twice the amount of money out of us.
If people are being encouraged to open savings accounts whilst still paying down debt then there is a good chance that this debt will then take longer to pay off and the banks will make more money through a prolonged payment period.
In addition, they will most likely be making money by sitting on the cash that you are putting away in savings!
And because the rates of interest charged on loans and credit cards are far higher than those paid out on savings accounts then this effectively makes saving whilst paying down debts counterproductive.
This is why you should fully take stock of your financial situation and try to pay down your debt before embarking on any savings scheme.
So if you do owe money through loans or credit cards, how do you go about paying down this debt so you can start saving?
The first thing you have to do is to work out exactly how much debt you are in, taking into account loans, credit cards and overdrafts a and then decide upon the best way to pay it off.
These calculations should include any, loans (including car insurance), credit cards and overdrafts, there is no need to factor in mortgage payments, and once you have a total you then need to work out how long it will take you to pay it back.
One of the best ways to work out how long it will take to pay your debt down is to create a personal budget that takes into account all of your income and expenditure.
To create a personal budget you need to work out exactly how much money you bring in each month and then calculate your total outgoings, including mortgage payments, utility bills, grocery bills, fuel bills and any everyday expenses such as train fares or newspapers. You also need to factor in annual expenses such as car and home insurance.
You then need to subtract you total expenditure from your income and the figure that you are left with is the amount that you should be able to pay off your debt each month.
And, once you have this figure to hand, you should then be able to calculate how long it will take to pay off your debt and work out when you can start saving.
This should also be used as an opportunity to review your spending and see where you can save money, whether through cutting back on everyday spending or switching credit cards or utility providers (comparison websites such as moneysupermarket a great resource for this), as this may enable you to pay down your debt sooner than expected.
In addition, when paying down debt it is important that you don’t add to it, so there can be no loan extensions or any more spending on credit cards.
The important thing to remember though is that saving whilst paying down debt will most likely be counterproductive, so pay down debt first and make savings second.
