This is because usually you pay more interest on a loan than the interest you earn on savings (after tax).
However, there are some cases when it’s good to do both – pay off debt fast and save at the same time.
Workplace saving
Some employers offer subsidised retirement savings schemes. This means that for every amount you save, your employer also contributes some money.
You may be better off paying into a scheme like this, as well as repaying your mortgage or other loan faster.
(The Government’s new KiwiSaver scheme, available from 1 July 2007, will also allow employer contributions.)
Saving for an emergency fund
It’s common sense to have a ‘cash cushion’ of, say, two to three month’s income you can call on if the unexpected happens. This means you won’t have to borrow money or be left financially vulnerable if your roof starts leaking or your car needs major repairs.
Saving for an emergency fund makes sense even if you’re paying off a mortgage, but may not be such a good option if you’ve got high interest debt.
Getting into the savings habit
Some people feel more comfortable starting a small savings scheme while they are still paying off a loan. You could set up an automatic payment from your pay – that way, you won’t even notice the money you ‘don’t have’.
You’ll get into the habit of saving, and start to build a small nest egg. You’ll also start to build your knowledge of savings and investment options, so that you’re better prepared when you want to start serious saving.
To find out more, visit the Retirement Commission’s free and independent website
www.sorted.org.nz. Sorted is packed with information, tools and calculators to help you manage your money.
