Recession proofing: Safe savings

Former_MSE_Lawrence

This discussion links on the back of the article:

Recession-proof your finances

Please read the article first, then come back to share tips on savings safety.

Blah99

This article has some really poor advice:

Debt isn’t something you can cancel, so being lumbered with it mid-recession is a nightmare. The absolute priority is to use any savings or spare cash to clear it. Many people fight against this, but the logic is irrefutable...

Owe a credit card £1,000 at a typical 18% rate and it’s costing you £180 a year. Yet £1,000 in even the top savings account after tax pays only 4%, that’s £40 a year. Therefore pay off the card with the savings and you’re £140 a year better off.

Even so, many people prioritise an ‘emergency fund’ over clearing debts. Again, for most this is a false logic, since clearing debts saves you money, and even if an emergency happened, you could simply use your credit cards to borrow the cash back making you no worse off overall. See the full guide linked below for a detailed explanation of the pros, cons and options.

For one your link actually goes to a "cancel my gym membership" page, but that's not the point.

Your advice is utterly wrong. If someone has a £3,000 credit card bill and £3,500 savings, you're advocating that they use up those savings in one hit to clear their debt. Your logic is because debts cost more over the long term, which as a base fact is correct.

What you're missing is that by encouraging people to use up all their "rainy day" money ("use any savings", "[an emergency fund] is a false logic" in your article) you are leaving them in a precarious position. That £3000 they have in the bank will allow them to live for 6 months (or whatever) if they lose their job, or have to take a paycut etc. If they spend all of it on clearing a debt they are left with absolutely no safety net, and will be left with the panic of wondering how to pay the bills.
Sure, by not paying off their debt they will pay more interest in the long term. But what's the better option here:

1. Keep a rainy day fund that, in the event of you losing your job, will allow you to cover your bills including your debts each month for several months

2. Use your cash to clear your debts, leaving you with nothing in the bank if you lose your job and no way to buy food or pay the electric bill.

This is possibly some of the worst advice I've ever seen on this site. A sensible approach would be for people to keep sufficient savings to cover at least 3 months of subsistence bills (food, heat, electricity etc), then use any remainder to clear debts.

Poor show, MSE.

halight

I think the best idea would be in the good times to save money in two accounts one just as savings and the other as a sort of 999 fund.
So if you lose your job you can use your savings to pay off any debt or a least a chunk of it.
But you keep ther 999 fund to live off i9f need be when other income drys up or if there is some sort of problem that needs sorting.

halight

By the way what iv wrote above is somthing that i wish i had done in the good times But did not.

But i shall be doing this when we get to the other side of this down turn,

1echidna

I don't myself see that it is bad advice to pay off the debts and save interest provided one's credit rating is good to borrow money in the event of a rainy day. Should everything be OK one will be better off and if the worst happens one will be no worse off.

LongTermLurker

Why is this cross-posted? Now you'll get mixed-up responses and non correlation. This is the right place for it, not the current accounts board where I've just posted.

Laurence - can you merge the two on here and close down other versions? I think it would be far simpler.

LongTermLurker

Blah99 - absolutely. At some point, you would expect to get your job back (or another one anyway). What's important is the ability to ride out the storm and maintain sanity, not necessarily put yourself in long-term security.