What is more important, paying off debt or saving for the future?

– Paul Damant, CFP (Director, Cornerstone Asset Management and Managing Director, Cornerstone Financial Services Group of Companies)

It’s no secret that South Africa doesn’t have a strong savings culture. In fact, we’re terrible at saving. So much so that recent statistics indicated that South Africans are among the worst savers in the world. What’s more staggering is that millennials, who will soon make up the largest chunk of the working force, are the biggest culprits with a mere 25% of people aged between 18 – 30 saving for retirement.

Saving means that you are spending less that what you are earning i.e. living below your means and investing the surplus of your income. This might seem simple, but for many young people there is simply never a surplus left and one of the main causes for this is over indebtedness. More and more young people start off their professional careers with mountains of debt ranging from student loans, micro loans, store accounts and credit cards making it nearly impossible to save.

As much as saving is a vital part of financial wellness, staying debt free is just as important which poses a significant dilemma that many young professionals struggle with: what should take priority, paying off debt or saving for the future?

The quick, academic answer would be: focus on the one that gives you better returns over a certain period – this could mean comparing the amount you’ll save on interest and fees from credit providers with possible returns from savings and investments. Although this approach is not wrong per se, it’s always better to personalise your approach as there is no “one size fits all” solution for financial wellness. Even though getting expert advice as part of a fully comprehensive financial services solution is the best way to ensure you make the right choice, here are some strategies that may help you decide whether to prioritise settling debt or saving for the future.

Be careful of commercial madness

When you just start earning your own income, you might be caught up in a commercial tornado where “looking” the part of a young professional takes president over financial discipline. This could lead to making mountains of expensive and unnecessary debt to give you the luxury items you feel you need to keep up appearances. When you have too much debt, you will never have enough money to save and you will never be able to build your wealth. To avoid the spiral on endless debt that so many young South Africans are caught up in, make sure that you live within your means, spend wisely and only buy things you really need and can afford.

An emergency fund should always take first prize

If you are just starting out as a newly employed young professional, setting up an emergency fund should be one of your top priorities. If you start paying more towards your debt without having an emergency fund, unforeseen expenses like car repairs or a co-payment for a hospital procedure can rake havoc on your monthly budget. Being out of pocket during emergencies might force you to make even more debt which will simply lead to a vicious debt cycle that is very difficult to escape from.

Once your emergency fund is set up and you feel that you enough funds to cover most unexpected emergencies, you can start focussing your attention on paying off your debt faster.

Healthy debt vs unhealthy debt

As much as there is some controversy over labelling debt as “healthy” or “unhealthy”, there is a solid principle behind it, especially when deciding whether to prioritise saving over paying off debt.

“Healthy” debt is an investment that will outgrow the cost associated with the debt made e.g. a home loan or vehicle finance and usually has a more affordable interest rate. “Unhealthy” debt includes consumer debt that is mostly used to buy items that almost immediately depreciates in value e.g. store cards or payday loans. These types of accounts usually have immensely high interest rates and should be avoided as far as possible.

The best strategy would be to get rid of the “unhealthy” debt as soon as possible instead of saving, because the cost of interest on these accounts far outweighs the returns you get from most investments. The “healthy” debt may take the back burner to saving, but many times you’ll find that saving and investing might give poorer returns than e.g. paying off your home loan five years sooner. Here especially, the best way forward would be for a qualified financial adviser to have a look at your assets and liabilities and guide you so that you can make the best decision possible.

Managing your own finances can be tough, especially when you are just starting out. Regardless of your situation, remember one of the golden rules of financial wellness by Suze Orman – People first, then money, then things.

At Cornerstone Financial Services Group of Companies, we put our clients needs above our own by offering a fully comprehensive financial services that puts our clients – you – first. Our main priority is to get you on the road to financial freedom so that you can enjoy life to the fullest. Click here to learn more about Cornerstone Financial Services Group of Companies.


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