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It is always useful to have some money saved which you can use to pay for unexpected expenses when they come along. We consider whether you can save each month while you are in a debt management plan.

Using a debt management plan (DMP) is a very common way of solving a debt problem.

The idea behind a DMP is to reduce the payments you make each month to your creditors to an affordable amount while paying back as much as you can.

Having said that, even while in a debt management plan, where possible it is extremely sensible to put aside some of your income each month to fall back on in case of unexpected expenses such as a surprise car repair bill or broken washing machine.

If you have some savings to fall back on when these situations crop up, it will mean that you can pay for them without having to miss one or more of your debt management plan payments and therefore put the agreement at risk.

How much can I save?

When you start a debt management plan, you have to calculate what you can afford to pay your creditors each month. This is done by deducting your living expenses from your income. You use what is left over to pay your creditors.

When going through this process, you have to be careful not to use expenditure figures which your creditors would think are too excessive.

Your creditors must be convinced that you are making your best effort to repay them as much as possible or they will be unlikely to agree to your proposed DMP payments and will not agree to freeze interest and charges.

For this reason your creditors will not allow you to include a specific amount for saving in your monthly expenditure budget.

Having said that, once your living expenditure budget is agreed, if you believe that you can live slightly more frugally there is no reason at all why you cannot save part of the allowed budget each month.

How to save

If you believe that you can save some of your living expenditure budget each month, in order to make sure you do actually put this aside, you need to plan to save.

The best thing to do is first work out what you can afford to save each month. Once you understand this figure, make sure you put this money aside at the beginning of the month when you receive your income.

Saving at the beginning of each month will ensure that they money you want to save is available.

If you wait until the end of the month, more often than not you will find that the money you planned to save has already been spent. Saving when you can afford as soon as you receive your income will mean that you do not miss it.

You should put the money you save a special savings account. It is best to ask your bank about opening a savings account for you.

Even if you had to start using a simple bank account when you started your debt management plan, your bank will always be happy to open a savings account for you as well.

Settling debt early

Having savings to fall back on while in a debt management plan will mean that you do not have to miss a monthly payment if you have to pay for an emergency or unexpected bill.

However, there is also another extremely good reason for saving while in your DMP.

If you can save a sum of money, you can use this to make a lump sum offer to one or more of your creditors to settle your debt with them early.

Settling debt early using a lump sum will mean that your creditors will write off part of your debt for you so it will be repaid far quicker.

If you target the creditors who may still be adding interest to your accounts, settling these early can be even more beneficial. The usual ongoing monthly payments that you continue to make will then start paying off your remaining debt far faster.

Pay off more rather than save

There is an argument to say that rather than saving each month, it is best to pay as much as you possibly can to your creditors so that they are repaid as soon as possible.

However, this is rarely the most sensible way thing to do.

A debt management plan will normally last for a number of years and during that time, you are bound to need some emergency funds to fall back on.

If you have some money saved, this situation will not be some much of a challenge.

If not, you will then have to miss one or more DMP payments. In turn this could the cause more problems as it may prompt your creditors start to adding interest and charges again where before they were frozen.

If you are able to save, you will also have the opportunity to settle your debts early with a lump sum which will mean that they are paid off far more quickly.

Saving while in a debt management plan is therefore an extremely sensible policy and should be done whenever possible.