Debt and savings

nigelhv

My apologies if this has been raised before - I just haven't found the threads concerned. My question is about Martin's advice not to save whilst you still have debts. For example, on page 307 of "The Money Diet" he says: "It staggers me that people have both debts and savings". I understand the logic - why bother with savings that earn a low rate of interest while you have debts that are costing a higher rate. However, most of us have mortgages, and they're debts. Does that mean that none of us should bother with savings until we've paid off our morgages? I'm trying to grasp the general principles here, so I can - hopefully - improve my situation.

JAMIEDODGER

hi nigelhv, and welcome to DFW.

i have both debts and savings.....but my most of my savings are for things that crop up through the year and not rainy day or investment ones. i have savings pots with ING and save for my car tax, a small amount incase an appliance breaks down (as i have 4 kids, its usually the washing machine!), xmas and birthdays, school uniform and school trips, normal clothing for the children.

i also have a pot where i am saving for a carpet for my front room, but also every month i am paying double the minimum payment on my debts and any extra i can afford aswell.

i think you have to look at it both ways......if i had no money in savings to replace my washing machine if it broke down.....i would probably have to use credit to buy one. this small amount i have saved towards household appliances gives me peice of mind too!
HTH

homersimpson_3

you're right mortgage is debt although many don't think of it as such-it's always best to have emergency fund (rainy day savings) and adequate insurance before you start targeting the mortgage. emergency savings should be at least 3 months salary or 6 months expenses (some say up to 6 months salary).
what if you lost job, had a leak, washing machine breaks down etc. put the rainy day savings in highest interest instant access acccount i.e somehwere you can get your hands on it straight away e.g. instant access isa (where you get all interest and none deducted at source (i.e. before the bank/building society gives it to you). paying off even small amounts off mortgage - say £40 per month- can knock off thousands of pounds in interest and reduce term (i.e. no of years you're paying it).
emergency savings and adequate insurance provides peace of mind.
say you used all money to pay off mortgage and had no savings. you have emergency and no lender is prepared to lend you any- what are you going to do? i haven't read/bought the new book but it should make this clear.

mountainofdebt

that even though its logical not to save whilst you are in debt, sometimes it makes sense to save.....I've got an ING account with separate savings for the car tax, the camping holiday next year and my son's uniform.

It does seem silly at times to be putting this money aside and not throwing it at debts but at least I know I won't be adding to the debt situation!!!!

jobbingmusician

I was recently unemployed for a period, unexpectedly, and went on to benefits. We had maxed our stooging, and had large amounts outstanding on CC - all the cash needed to pay these off was sitting in our (flexible) mortgage account.

When assessing assets for benefits, the ever-lovely benefits people counted our assets, but took no heed whatsoever of our debts. If we had paid the debts off suddenly, this would doubtless have been seen as an attempt to reduce our assets :mad: (and in fact the unemployment came so suddenly we didn't have a chance to do this).

So just a word of warning to all you stoogers out there - bear in mind what would happen if you suddenly lost your income... :rolleyes:

(Story had an OK outcome, as I am now in a new job which I love). :j

Xbigman

I think this thread so far has taken the concept of 'savings' and 'debts' far to literally. If you have money put aside for specific things like car tax or electrical goods this is not what I call savings, I call it budgeting. Just because you are smart enough to put that money away to earn interest does not change the fact it is no more than good cash flow managment.
I think Martin is talking about people who, for example, have thousands in an ISA, because it saves tax, but who pay out on credit that costs more. Now that is silly. I know there is an argument about having money for a rainy day but if you are in debt your best security is to pay it off.

Mortgages are debt, but acceptable debt. They are also on a bigger scale. If someone has a few thousand tucked away or they are saving larger sums for something specific and only a mortgage to pay out on, I see no problem with that. If you have a mortgage and are just stacking more and more into savings then you should pay off the mortgage to get the best return on your money.
Regards



X

homersimpson_3

when i read the book, i read it the same way as nigelhv- to me saving is putting money aside (into a bank, a pot or building soceity account etc) most people unfortunately don't make these distinctions and if the book does not make this clear at the outset people could make wrong financial choices which have drastic consequences i.e. use all money after paying usual monthly outgoings (mortgage, insurance, gas, electricity, food etc)
to pay off mortgage and not put any aside for xmas, car, emergencies etc. i posted the same question.

---lee---

Xbigman wrote:

I think this thread so far has taken the concept of 'savings' and 'debts' far to literally. If you have money put aside for specific things like car tax or electrical goods this is not what I call savings, I call it budgeting.

I agree with this completly.

I’ve worked out that from January, I can overpay my mortgage by 5k per year (on a monthly basis) without incurring penalties and therefore significantly lowering the interest paid and the term.

I don’t see the point in putting the money in any form of savings when I can get a much better ‘return’ by paying off my mortgage.

My budgeting still allows for other one off payments during the year like car tax, insurance etc as well as holidays. These are not savings.

For any short term unplanned emergencies, I have access to lines of credit like credit cards and overdrafts (not in use). I can then stop any overpayments to repay these.

For more medium to long term arrangements, I have insurances in place and can always sell my house if necessary.

Lee.

JollyNolly

So are we saying that morgages are really a special case of debts - they attract a lower rate of interest, and are generally more flexible than other types of debt - so we do our best to reduce the interest and repayment period on our mortgages, maybe by overpaying, etc. But we'd do this by using the cash we've got left over at the end of the month (I wish!!) rather than plundering any long term savings. In fact, coming to think of it, is there ever a time when you'd want to pay off a debt with savings? Wouldn't it always be better to move the debt to a low or 0% interest option?? Then you can keep putting savings away, safe in the knowledge that whatever interest you're getting on your savings is going to be more than the 0% you've got on your debts??

---lee---

JollyNolly wrote:

So are we saying that morgages are really a special case of debts - they attract a lower rate of interest, and are generally more flexible than other types of debt - so we do our best to reduce the interest and repayment period on our mortgages, maybe by overpaying, etc.

That's my take on it - and according to my calculations, this will save me a fortune.

But we'd do this by using the cash we've got left over at the end of the month (I wish!!) rather than plundering any long term savings.

That's my intention. If you don't have any cash left over at the end of the month, then it's probably better to have some spare cash in an emergency fund.

I think the point is that if you are saving every month, it's probably more worthwhile to overpay your mortgage.

In fact, coming to think of it, is there ever a time when you'd want to pay off a debt with savings? Wouldn't it always be better to move the debt to a low or 0% interest option??

That would probably be the best route - but 0% options are not available to everyone.

...Then you can keep putting savings away, safe in the knowledge that whatever interest you're getting on your savings is going to be more than the 0% you've got on your debts??

Unless you have a mortgage in which case it's probably better to overpay on that - unless you can get some sort of fantastic return on your savings, which is unlikely.

Of course, it all depends on your circumstances. If you have a 100% mortgage and little or no equity, if interest rates go up and house prices fall, then you are going to be in trouble if you cannot sustain your repayments and potentially lose your home and the 'savings' that you have put into the mortgage.

If your interested, I knocked up a spreadsheet to help me work the savings by overpaying in Excel. If you PM me your email adr and I'll email it to you.

Xbigman

My only debt is my mortgage and I organize my savings on the basis of having a small buffer in case of problems with my budgetting or emergencies, plus I have a 'replacement' fund to cover breakdowns in electrical items, furniture wearing out, or simply replacing outdated stuff.
I don't have anything put aside for Xmas and the like, but I do budget for it. I am in the happy position (after 20 years of !!!!!!) to have enough free income to cover those expences as they occur so I spreadsheet in advance and simply save less in months where these things come around.
Outside of that I plan to save a lump sum to pay off 10% of my mortgage each year and reduce the amount of the mortgage each time, keeping the same term. Reducing mortgage or reducing term is a whole separate issue but my view is that being 42 with 22 years of mortgage left to pay I don't want to knock a few years of my mortgage term only to find I'm 60 and past enjoying the money. This way I can be an :A and sensibly reduce my mortgage whilst getting the immediate benefits of having more income.
Its also a point that as I pay off those 10% lumps, then the next 10% is smaller and I have more income to save it with. This is simply :T .
Regards



X