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[MSE Archna]

This thread is specifically to discuss the content of the

Pay Off Debts With Savings Article

To discuss or ask a question about the article: click reply

[southernscouser]

Generally speaking it makes sense to use savings to pay off debt.

BUT

I have savings! Well £300 of Premium Bonds. But I'd rather pay the extra bit on the interest than use them to pay it off coz it gives me hope to cling on to that I'll get a win and be able to pay off all my debt!

Remember; 'Hope is a good thing, maybe the best of things!' Andy Dufresne

[lynzpower]

Ok, Ive read this, and much as I agree with it, theres still the need to have some savings when you have debt. In saying that none of my debt ( bar 100 odd) is on 17% interest, everythings on 0%, we have a bit set aside towards Xmas. Not a lot, but a bit. If we gave that to 0% debt, then wed be using the cards for presents, not going to happen is it!

If you have savings in an account with a higher return than your debt of course, then you can make money from banks, there are plenty of us with student loan overpayment money stashed in ISAs for example.

[Imelda]

I totally agree, I have savings but it's all earmarked for things that I know are going to crop up in the future, car tax, insurance, maintenance christmas etc. I think what Martin is trying to get across is that it's pointless to have money for "just in case". My OH was a bad one for that, over £50k in cash sitting in his bank, he didn't even think to make overpayments to his mortgage or AVCs to his pension fund. I think I am going to have to physically wrestle a cheque off of him to pay off his mortgage when the fixed period runs out next year!
I am currently saving up to pay off my credit card which is on 0% (the temptation to pay it straight off is huge but pointless). Once that is done I am going to save for a holiday but put the rest towards paying off my mortgage.

[ZTD]

As with many things, it depends on your appetite for risk. I think the £5,000 example was a lot OTT, but a small bit of (LIQUID!) savings of a couple of hundred (for example) would be good insurance against the unforseen. It's a bit like oil on moving parts - you don't need much - but you do need some.

After all, when a taxi dumps family on your doorstep at 2am Sunday morning when their house has burnt down - what kind of loan will you get then?

[Kevicho]

Depends on whether the debt is good debt (ie 0% BT or lower ineterest rate than the savings) or bad debt (high credit card/low interest savings)

I have 250 in shares at the moment, but £3800 in loan to pay off, it makes no sense for me to pay off the loan as they want early payment fees and all that jazz, so im saving up and learning investing

[Kevicho]

"Put most simply, when you save money you’re actually lending your cash to the bank for it to use, and lend on to other people. The difference between the rate at which it borrows money from you (the savings rate) and the rate it charges others (the borrowing rate) is its profit. Therefore on the whole it’ll always cost more to borrow than you can earn by saving."

Id never thought about it that way before lol

Scandalous isnt it

[ZTD]

Originally Posted by Kevicho

"Put most simply, when you save money you’re actually lending your cash to the bank for it to use, and lend on to other people. The difference between the rate at which it borrows money from you (the savings rate) and the rate it charges others (the borrowing rate) is its profit. Therefore on the whole it’ll always cost more to borrow than you can earn by saving."

That explanation is actually wrong. It's a quite bit more complicated than that. Anyone want to dare Martin to explain fractional reserve banking?

Originally Posted by Kevicho

Id never thought about it that way before lol

Scandalous isnt it

The reality is rather more scandalous.

[Kevicho]

It is more complicated, however most people would probably fall asleep when looking at the layers of seediness in the banking industry

[MSE Martin]

Hi folks

Thanks for the replies. I thought I would add a few comments - as I think there's a little bit of confusion between what's written here and what's actually contained in the article....

1. It's ok to keep a few hundreds in savings if you know what they'll be spent on.

Actually I disagree, you may as well pay off any expensive debts in the meantime and borrow the cash back when you need to pay - saving yourself the interest payment in the interim.... unless that is your debts is as follows

2. The exceptions

In the article there were two key exceptions to the theory. The second is the following

The Interest Free/Very Cheap Debt Exception. Those who carefully and conscientiously manage to move debts to be constantly interest free can actually profit from having debts. If your debts are interest free and cost you nothing then, rather than repaying them, it’s better to save the money and earn interest on it. In effect you’re being paid on money lent to you by the banks for nothing.

Yet this technique is only for serious system players (see Revenge! Free Cash from Credit Cards), most people should just try and get rid of their debts as quickly as possible."

It's this bit that's confusing people I think a few of you scanned past this when you read.

Of course if your debt is at 0% then the need to repay it isn't there. Thankfully most people here have used all the other techniques on the site and now have the discipline to do this. Yet remember most people still pay interest on their debts and do it at high rates. They also grab a 0% card than forget it and let it go back to the go to rate.

However I may go in and tweak this bit to make it a bit more detailed - as it seems to be the bit that's missed.



3. ZTD - banking explanation.

No I think i'll leave the massive complexities of fractional reserve banking for now. And my explanation missed out much more than that - the cost of branch and admin systems - interbank borrowing - etc before we even go there.

That's why I started it, ""Put most simply", its understanding the essence of banking that's important here. The most important bit is that when you save with a bank you are effectively lending it your cash.... that's what people need to get

Hope this is useful

Martin

[Imelda]

Having thought about this I am not sure I totally agree, for me getting out of the habit of putting things on my credit card was a big step forward in my debt free road. For example if like Martin is saying I should use my xmas savings to pay off my debt and then use my credit card to pay for xmas I for one know that I would not stick to any kind of budget (maybe just the limit on my credit card- £10,000 anyone?). Whereas this year I plan on paying for xmas with cash, I cannot overspend this way. I understand the logic but I think it's only a good idea for the strong willed, and to be honest a lot of us got into a mess because we didn't have the power to stop ourselves spending.

[Snaggles]

Hello! In part I agree with you Imelda - it's a bit like saying an occasional glass of red wine is good for you - tell that to an alcoholic for whom one glass would lead to another..... and another..... and another.....

However, I think it's also worth noting that Martin's main area of expertise is money saving and this is the angle he is coming from when he says you may as well pay the debts off now and borrow it back when you need it, because financially it makes more sense to not pay interest in the meantime.

With any advice, you do need to ensure it is appropriate to you and your circumstances before you follow it (wish I'd thought of that when the sales assistant said luminous orange was going to be 'the' colour this season )

PS Savings? What are they? Lol!

[MSE Martin]

Thank you.

OK folks - I've had a rethink on this. Sometimes the practical has to surprass the theoretical. I can accept that keeping yourself 'on track to be debt-free' can outweigh the numbers. As such i've added the following to the article

The Discipline Exception.

Those making a concerted effort to repay serious debts may find the idea of re-using credit cards a real danger. Yet while it's the sensible strategy for an emergency fund, as there's no guarantee you'll ever need it, there is some justification for making small savingvsw provisions for specific future events.

For example, saving a small amount each month towards Christmas (see budgeting article) for those who can't trust themselves to stick to the limit on credit cards, is a sensible personal financial strategy. Yet it should only ever be for limited amounts of cash.

PS you may find the video i've added to the article quite fun too

[ZTD]

I think Martin's problem is that he has to pitch himself at the broadest audience possible. This includes the financial savvy to the financially ignorant, and from the meticulously organised to the "it's in there somewhere".

Dipping in and out of credit is a great idea, if you follow it to the letter. Many people can't for whatever reason (often external), and getting it wrong is penalised far more heavily than getting it right.

I suppose he can't help putting himself as his target audience and saying "What would I do?". That's financially savvy + organised for you...

And yes, I know I was tugging Martin's leg ever-so gently () about fractional reserve banking, but taking his "playing the interest rates" to the ultimate degree means you also take inflation into account. If the *real* inflation rate is higher than the real interest rate you are paying (i.e. like right now), then it is worth getting yourself into debt up to the eyeballs, buying "something" that retains its value during inflation, and waiting for the money to come in.

Lots of people are doing this - the "something" they've chosen is housing. Whether this is a wise choice, time will tell.

However I certainly wouldn't recommend this - this is the disorganised and cowardly part of the population calling...

The way I do it, is save up for stuff that you know is coming (like car tax etc), have a little bit on hand to be able to paper over anything critical (a couple of hundred - not thousands! - to keep you liquid), and only use debt if something major goes bang (like a boiler).

Yes you lose little bits of interest, but you also lose large bits of charges if things go wrong. Think of the lost interest on the couple of hundred as insurance - it's wasted money until you need it.

I hope this makes sense to people.

[ZTD]

Oh well, that crossed. Teach me to take so long in reading/writing stuff...

[desperate saver]

I am quite a saver and have £126,000 saved, a mortgage of £46,000 and my house is worth @ £250,000. I do am in a quandry as to whether or not to pay off my mortgage. I currently have an openplan mortgage, where £46k of my savings is offset against my mortgage. I am not a risk taker when it comes to money, being very shrewd, hence the large bank balance!! There are a couple of things that have stopped me paying my mortgage off, the first is that i would like to have a go at property developing, and feel it would be easier having the cash to do that, rather than borrow it (although when it comes down to it, i always get cold feet)and the second is that if i decide to move up the property market and sell my present house, if i have paid off the mortgage, my husband would be very reluctant to get another!
At the moment i am not saving as much as i would like, i was saving 1.5k per month, but my children have a very expensive hobby that is costing a small fortune, but am still managing @ £750-£1k.

PLEASE ADVISE!!!!!!!!

[southernscouser]

Originally Posted by desperate saver

I am quite a saver and have £126,000 saved, a mortgage of £46,000 and my house is worth @ £250,000. I do am in a quandry as to whether or not to pay off my mortgage. I currently have an openplan mortgage, where £46k of my savings is offset against my mortgage. I am not a risk taker when it comes to money, being very shrewd, hence the large bank balance!! There are a couple of things that have stopped me paying my mortgage off, the first is that i would like to have a go at property developing, and feel it would be easier having the cash to do that, rather than borrow it (although when it comes down to it, i always get cold feet)and the second is that if i decide to move up the property market and sell my present house, if i have paid off the mortgage, my husband would be very reluctant to get another!
At the moment i am not saving as much as i would like, i was saving 1.5k per month, but my children have a very expensive hobby that is costing a small fortune, but am still managing @ £750-£1k.

PLEASE ADVISE!!!!!!!!

Why don't you invest it in moi!

To be honest you might get a better (and sensible) response in the savings and investments board!

[Alleycat]

The only worry I would have with using savings to reduce someone's debts would be if they had a shot credit rating. So, say someone has a £500 emergency fund earning 4% interest, but has debts of £5000 at 6.5%, yes in theory using that £500 to knock off some of the higher interest debt would be sensible. But if that person had a knackered credit rating and their washing machine broke down or there was some other emergency they would have no emergency reserves to go out and buy a new machine etc. They might be able to save up the £300 or whatever needed for a new machine over 4 or 5 months whilst continuing to pay their monthly loan installments, but what would they do in the meantime? Most people would say sod it and go and buy a new machine on credit at possibly 10-20% (or more) interest. Depending on the emergency they might not have time to shop around, transferring balances and need the cash NOW. They might get refused credit from a normal high street lender and have to go down the Provident/door knocker route which would cost them far far more.

[desperate saver]

thought this post was to do with using savings to pay off debts, well isn't a mortgage a debt! if you did not know that, thats perhaps why you are in so much debt!!

[ZTD]

Originally Posted by desperate saver

thought this post was to do with using savings to pay off debts, well isn't a mortgage a debt!

The point was that savings get less in interest than debt. In the case of mortgage debt - that isn't so much of a given. Especially with introductory rates, and in this particular case an offset-mortgage which reduces the effective rate of interest of the debt, and raises the effective rate of the savings. And tax free to boot...

Originally Posted by desperate saver

if you did not know that, thats perhaps why you are in so much debt!!

I'm sure your point was made without this bit.