A guide to interest rates, savings & clearing debt quickly. Should I pay off debt, save money or enjoy life?

This four part article is a one-stop guide for everything debt, savings and income related. Here’s everything we’ll cover together:

  • Part One: A guide to understanding debt and key financial terms: The first part of this article will explore financial terms – looking at interest rates, APR, savings and how debt can accumulate. Debt can be overwhelming – it’s crucial to make sure you have a good idea of what you’ll be expected to repay on any borrowing. The more knowledge we have, the more equipped we are to make good financial choices.

  • Part Two: With the current high interest rates, should I pay off debt or save money? (Or just enjoy my life!) Next, we’ll explore whether it’s best to pay off debt or save money. This really depends on your individual financial situation and goals – so have a look at both sides of the equation to make an informed decision based on your personal circumstances. And, we’ll look at saving money vs enjoying life – the financial balancing act!

  • Part Three: Why is saving money so difficult? (And what you can do to overcome it!) This section will help you to understand what might be preventing you from getting on top of your savings. By identifying any problem areas, you’ll be able to get your finances back on track in no time.

  • Part Four: How can I clear my current debt quickly? Finally, the article will cover ways to get on top of your debt – looking at frugal living strategies to clear existing debt quickly and change future spending habits. I’ll also give you some quick ways to boost your income – to redirect even more cash towards gaining financial freedom. So, let’s get started!


Part One: A guide to understanding debt and key financial terms.


What is APR?

APR stands for ‘Annual Percentage Rate’ – the total cost of borrowing over a year. The APR includes a combination of both the interest rate and any additional fees or charges associated with a loan or credit product. You’ll see this term used for loans, credit cards and mortgage offers, making it easier to compare different loans. It’s typically higher than the interest rate because it accounts for all of the costs involved in borrowing.


What is the interest rate?

The interest rate is the cost of borrowing money expressed as a percentage – it represents the rate at which you’ll be charged interest on the amount borrowed. But, it doesn’t include other fees or charges associated with the loan – if two loans have the same interest rate but different fees, the loan with higher fees will have a higher APR.


What is a ‘representative’ APR?

A ‘Representative APR’ is a specific APR that lenders use to advertise their financial products – it’s meant to represent the typical APR that a certain percentage of borrowers (at least 51% of customers) are likely to receive. When you apply for the credit, the lender will assess your financial situation and provide you with an individual APR.

If you have excellent credit, you may receive an APR lower than the representative APR. Whereas if your credit is less favourable, the APR that you’re offered may be higher. You might not know your personal APR rate until after you’ve applied but, whether you take it out or not, it could affect your credit rating. Lenders will usually check your financial background with a credit reference agency before deciding whether to make you a loan offer – so remember that these checks will be recorded on your file.


What is compound interest?

Compound interest on a credit card is the application of interest not only to the outstanding balance (the initial amount borrowed) but also to the accumulated interest from previous periods. In other words, when you carry a balance on your credit card and don’t pay it off in full each month, the interest you owe on the balance can compound, causing your debt to grow faster over time.

credit cards in pocket


How does compound interest work on a credit card?

  1. Initial Balance: When you make purchases on your credit card, or carry a balance from a previous month, you have an outstanding balance. The credit card issuer will charge interest on this balance.
  2. Monthly Billing Cycle: Credit card companies typically calculate interest on a daily basis but apply it to your account monthly. The interest rate is usually expressed as an Annual Percentage Rate (APR), which is divided by 12 to determine the monthly interest rate.
  3. Interest Charges: At the end of each billing cycle, the credit card company calculates the interest on your outstanding balance. This interest charge is added to your balance, increasing the amount you owe.
  4. New Balance: Your new balance becomes the basis for calculating interest in the next billing cycle. This means that the interest is applied not only to your original purchases or debt but also to the interest charges that have accumulated in previous months.
  5. Repeat: The process repeats in each billing cycle, with interest continually being applied to the total balance. This includes both what you’ve spent / borrowed and any previously accrued interest.


What does this mean for my repayments?

Compound interest on credit cards can lead to your debt growing rapidly if you consistently only make minimum payments. To minimise the impact of compound interest, and reduce credit card debt effectively, try to pay off your balance in full each month.

Sometimes lenders will offer a 0% introductory interest term; you’ll pay nothing extra on what you owe as long as you pay it off within the time set. But, it’s crucial to understand what the repayments will be if you don’t repay it in time, causing the real APR to kick in. Though, you could also transfer the remaining balance to a cheaper credit card when the lower interest rate ends.


How does compound interest differ from simple interest?

Simple interest is commonly used for straightforward loans, such as car loans or personal loans, where the interest doesn’t compound (grow). It’s calculated on the original amount borrowed and does not take into account the interest that accrues on previously earned interest.

With simple interest, you’ll have a fixed monthly payment with the interest included – this can be a more manageable way of borrowing money. Just remember, whichever way you choose to borrow, get professional financial advice in order to make informed choices to ensure that the debt you take on will be manageable. And, where possible avoid debt entirely – save, save save!



Part Two: With the current high interest rates, should I pay off debt or save money? (Or just enjoy my life!)

There’s no straight answer for this unfortunately, yes interest rates have risen but there are lots of factors to consider when deciding whether to save or pay off debt. It’ll all depend on your personal circumstances, goals and financial situation – so take a look at these reasons for paying off debt / saving money to help you decide what’s best for you and your family.


Reasons for paying off debt:

  1. Interest Rates: Start by assessing the interest rates on your debts. If you have high-interest debts, such as credit card debt or payday loans, it usually make the most financial sense to prioritise paying off those debts as soon as possible – the interest on these debts can accumulate quickly and become a financial burden.
  2. Debt Type: Different types of debt carry different levels of urgency. Mortgages and student loans, for example, typically have lower interest rates and longer repayment terms. You may not need to rush to pay them off if you have more expensive debts to tackle first, or wish to save some money alongside these regular monthly payments.
  3. Financial Stress: If your debt is causing you significant financial stress, paying it off can provide emotional relief and improve your overall financial well-being.
  4. Credit Score: Reducing or eliminating debt can have a positive impact on your credit score, which can be important for future financial opportunities, such as getting a mortgage or a lower interest rate on loans.
  5. Debt-to-Income Ratio: Lenders consider your debt-to-income ratio when assessing your credit score. Paying off debt can improve this ratio, making it easier to qualify for loans in the future. Those in a better financial position will likely get offered more favourable rates too.


Reasons for saving money:

  1. Emergency Fund: Building an emergency fund is an important financial goal. Having savings to cover unexpected expenses or emergencies can prevent you from going deeper into debt when unexpected costs arise, so this may be a savings area to prioritise.
  2. Employer Match: If your employer offers a retirement savings plan where they add a contribution, consider taking advantage of this benefit. It’s essentially free money that will make life easier further down the line.
  3. Financial Goals: Consider your financial goals beyond debt repayment. If you have specific savings goals (such as buying a home, starting a business, or retiring comfortably) you may want to allocate some funds toward those goals while also addressing your debt.
  4. Investing: If you have low-interest debt and are confident that your savings can produce a better return than what the interest on your debt is costing you, then you may choose to invest rather than aggressively paying off debt.


Saving Money vs Enjoying Life – a financial balancing act

Striking the balance between being sensible and saving money, vs enjoying your life and making the most of your time is a real balancing act. Whilst it’s important to look ahead to the future, be prepared and make wise financial choices, we also need to remember that we only get one life. Here are some tips to help you navigate the balance between being money smart whilst trying to live your life to the fullest…

  • Set clear financial goals and create a budget: To prioritise, define your financial goals – both short-term and long-term. This could include saving for emergencies, retirement, a holiday, or a home, or paying off debt or your mortgage. Then create a budget to allocate funds for both necessary expenses and non-essential spending, so that you can still enjoy life while saving responsibly.

couple budget computer

  • Start an emergency fund: As I mentioned above, building an emergency fund should be a top priority. Having savings to cover unexpected expenses or emergencies can provide peace of mind and prevent financial stress – sometimes being sensible has to win!
  • Automate your Savings: Consider setting up automatic transfers to a savings or investment account. This way, you’re consistently saving a portion of your income without having to think about it – and if it’s gone before you notice it you won’t miss it. Try to save for special occasions and predictable expenses, avoiding debt as much as possible.
  • Differentiate wants from needs: Ensure that you are meeting your basic needs first – such as housing, food, utilities and transportation, before allocating funds to everything else that’s non-essential.
  • Prioritise enjoyment: Life is meant to be enjoyed, and it’s important to allocate some of your spare funds for activities, experiences and purchases that bring you happiness. Budget for entertainment, dining out, travel, hobbies, and other leisure activities, as well as the boring stuff – saving doesn’t always have to be for sensible things, you’re allowed to have fun too!

holiday beach hammock

  • Seek value: When you do spend money on the fun stuff, focus on getting the best ‘bang for your buck’. Look for deals, discounts and ways to enjoy your favourite activities without overspending – everything saved can be put towards more fun!
  • Set limits: It’s important to establish spending limits for non-essentials in your budget – this helps prevent overspending while allowing you to enjoy life within your means.
  • Regularly review and adjust: Periodically review your budget and financial goals – making adjustments as needed to ensure that you are saving enough while still enjoying life. Sometimes you might have to have a ‘less fun phase’ or try a saving challenge to give your finances a boost.
  • Consider long-term investments: Once you have built an emergency fund and are consistently saving, consider long-term investments that have the potential to grow your wealth, such as retirement accounts and investment portfolios. It can seem a little boring to plan ahead – but keep a balance between living for the now and making sure that your future will be comfortable too.


Part Three: Why is saving money so difficult? (And what you can do to overcome it!)

So, you’ve decided to focus on saving money but there’s no denying that, even with the best intentions, saving money can be a real challenge – and often the obstacles vary from person to person. So, why is saving money so difficult? Here are some common factors that can make saving money a challenging task, and some tips to help you to overcome them:


1. Limited income:

The most obvious barrier to saving is a limited income – it can be really challenging to save money because there may not be much left over after covering essential expenses like housing, food, transportation and childcare. But, don’t give up – start small, perhaps with the £1 saving challenge, and make the most of any additional help, like the governments: Help To Save Scheme for those with a low income.

help to save HMRC ad


2. High expenses:

High living expenses, such as rent or mortgage payments, student loans and credit card debt can make it difficult to save money. Where possible, shop around to get rates as low as possible – and, if you’re really keen to reduce your outgoings, downsizing or relocating to a cheaper area might also be something to consider.


3. Lack of financial education:

Let’s face it, the UK school system is not set up to give us a good financial start in life – most people just aren’t taught basic financial literacy skills, such as budgeting, saving and investing – kids are not prepared for the real world at all. Without this knowledge, it’s hard to make informed financial decisions, but don’t despair – with the internet at your finger tips, it’s entirely possible to find the answers to just about everything.


4. Impulse spending:

Impulse buying and spending on non-essential items can quickly eat into your savings. The ease of online shopping and the availability of credit can exacerbate this problem, making it harder to resist temptation. For unnecessary purchases, delay buying the item for 24 hours at least. Ask yourself: Do I need it? Do I love it? How much use will it get? Will it improve my life?

lady with shopping bags


5. Peer pressure and social expectations:

Social pressures to keep up with friends or peers in terms of spending on entertainment, dining out or material possessions can lead to overspending. As hard as it can be to avoid trying to keep up with the Jones’, make sure you focus on your family’s needs and goals and say no when you need to.


6. Unexpected expenses:

Unexpected events like car repairs or home maintenance can derail your savings plan by forcing you to dip into your savings or use credit when you weren’t planning to. This can be unavoidable – life is always throwing us curveballs – but try to be prepared by developing an emergency fund for such occasions.


7. Psychological factors:

Some people struggle with emotional spending, using shopping as a way to cope with stress, anxiety or other emotional issues. Speak to friends and family, or seek professional help, if you feel your spending habits have gotten out of hand. It’s entirely possible to reverse bad habits, and develop new positive routines, with the right plan and support.

lady stressed on computer


8. Short-term thinking:

Humans tend to prioritise immediate rewards over future benefits – saving often involves delaying gratification, which can be difficult. But if you set small, clear steps for success, set some goals and keep focussed, you’re much likely to stick with it long-term.


9. Debt:

As I mentioned above, high levels of debt, especially high-interest debt like credit card debt, can make it difficult to save because a significant portion of your income goes toward paying off debts which just keep growing. It can be worth consolidating debt onto low interest loans or credit cards, and seeking professional help is always a good idea. Once you clear your debts, set up some spending rules to avoid going back to old habits.


10. Inflation:

Inflation is so annoying – every time we earn more and things feel easier, inflation is there to make it harder all over again. And, the rising cost of living is a real issue in the UK at the moment – making it harder for everyone to maintain their usual standard of living. I can’t fix inflation, nor make it less frustrating, but make sure you update your budgets accordingly to avoid overspending where possible.

lady doing her budget on a computer


11. Low savings interest rates:

In an environment with low interest rates, the returns on savings accounts and other low-risk investments may not keep pace with inflation, reducing the incentive to save. If you’re feeling frustrated, educate yourself and look into other investment options to see if you can make a greater return on your cash. For higher rates without risk, often locking cash into ISAs and other savings accounts for a longer amount of time will provide you with a better interest rate.


So, what now?

To overcome these challenges, it’s essential to create a budget, set clear financial goals, prioritise saving, and seek out financial education and advice. It can also be helpful to have a portion of your income automatically deposited into a separate savings account on payday – keeping that cash away from your everyday spending. Developing good financial habits, limiting debt and making conscious choices about your spending can gradually make saving money easier.


Part Four: How can I clear my current debt quickly?

If you’re desperate for a fresh start, think about how you can adopt frugal living techniques to drastically reduce what you’re spending in order to redirect that money towards clearing debt quickly.

Simple lifestyle changes can very quickly impact your finances in a really positive way. Reducing spending by £5 each day (which could literally be a coffee or a shop bought lunch) will save you £1800 each year! Now imagine how quickly that spare cash would accumulate if you begin to make even bigger savings, across your spending as a whole.

Easy first steps could be:

  • Implementing a budget and tracking your spending.
  • Packing a lunch for work.
  • Meal planning before a food shop.
  • Cancelling unnecessary memberships and subscriptions.
  • Shopping second-hand.
  • Taking on a DIY approach for as many things as possible.
  • Do a monthly ‘no spend challenge’ to boost savings quickly.

To get started, you’ll want to check out my article:

The Ultimate Family Frugal Living Guide: 25 simple tips to save you money!

ultimate family frugal living guide, frugal mum tips, 25 ways to save money, simple lifestyle

Another surefire way to clear debt quickly is to boost your income, but live lower than your means – redirecting anything extra to paying everything off in order to reduce stress and gain financial freedom when you achieve your new debt free life.


Here are a few quick ways that you could boost your income:

1. Rent out your drive

If you live in a busy area, you could make some extra money by renting out your drive to those who are sick of paying hiked up parking prices. If you’re out all day anyway, and your drive will be empty, then why not make some money out of it? A quick internet search will bring up plenty of places for you to list your drive, and it could be easy money.


2. Offer your services

We all live such busy lives, so it’s no surprise that lots of people delegate the tasks they just don’t have time for. If you have a talent for ironing, cleaning, gardening, dog walking, DIY or anything else that might be handy, make the most of your local Facebook pages and advertise your services. Setting up a little side-line could be a super way to boost your income!

person gardening


3. Apply for Marriage Tax Allowance

Marriage tax allowance allows you to transfer £1,250 of your personal tax allowance to your spouse or civil partner, if they earn more than you, as long as one of you is a non-tax payer. If you are eligible, it will lower the higher earner’s tax bill for the tax year.  But you can also backdate your claim by up to four years – which could see you get a payout for hundreds of pounds!


4. Get crafting

If you’re a keen crafter, a whizz on the sewing machine, or perhaps have a way with wood; put your skills to good use and start a side-earner from home. There are lots of free platforms to advertise what you make without spending a penny, or use websites like Etsy and start a selling profile. Personalised, hand-made items are always in high demand, so it could be a great way to bring in some extra cash, whilst enjoying your hobbies.

knitting craft diary


5. Join a cashback website

We all shop online to get the best deals, so why not go a step further and get money back on your purchases and necessary bills like insurances? It sounds too good to be true, but it’s definitely not and some of the cashback deals are brilliant – if you were going to make that purchase anyway you may as well get a little return on it. We’ve had almost £3000 from cashback websites!


6. Take in a lodger

If you have a spare room, you could rent it out to boost your income – earning up to £7,500 per year tax free. If you don’t like the idea of a full-time house guest, it could be an idea to look into short-term options such as Air Bnb or foreign exchange students – you could earn upwards of £80 per week per student hosted.

bedroom tidy


7. Tell your story

If you have an interesting story, or even an amusing photo, you could earn some cash by selling your tale to a magazine. Think you’re not interesting enough? Most of the time publications just want to talk to real people with experience of topical issues – perhaps a diet trend or pregnancy story.

Join the FeatureMe! Facebook group to see current requests from writers and TV shows that are looking to pay people willing to talk about their experiences, usually for at least £100. Or, pitch your story directly to a magazine, such as Take a Break – who will pay up to £2000.


8. Be credit card savvy

As long as you pay it off in full each month to ensure there is no interest to pay, which is best organised with a direct debit, spending on credit cards could help you to boost your income. Cashback credit cards pay you back a proportion of what you spend each time you use them. You can earn £100s each year, with some paying up to 5% cashback – just use the card for all of your normal spending.

someone paying in store with credit card


9. Get paid for your opinion

If you have some spare time, why not sign up to a survey website or attend a face-to-face market research focus group? While it takes a while to earn larger amounts through surveys, you could get paid between £30 and £160 for a face-to-face group. Just give your opinion, and you might even get a free lunch thrown in too!


10. Ask for a pay rise

So often we work tirelessly for years for the same employer and, even as inflation rises, our wages stay stagnant. Ask for a meeting, and prepare some pointers as to why you feel you deserve a wage increase – the worst they can say is no! A loyal, experienced team member is worth its weight in gold, so it’s definitely worth asking; you might be pleasantly surprised with the response!

two women talking with laptop at desk in office


11. Declutter and sell what you don’t need

My printable 30 day decluttering guide will help you to get started with decluttering and organising your home. Sell the things you don’t need – even little amounts, £5 here and there, will soon accumulate – you might even have some items that could fetch a decent amount of cash.


Want to get on top of your finances and boost your savings? Check out these articles:

How to create a family budget, understand your finances and save money!

How to save money for a mortgage – 20 tips for saving for a house deposit!

The 12 best money saving challenges to try today!

And don’t forget to check out what you’re entitled to, to give your income a boost – How to claim Child Benefit online.

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