Discuss: Is it worth building savings while you're paying off your debts?

Johnny_Chaos

This year I've saved money in an account that I haven't used for years. I don't save a huge amount (usually between 20 and 100 pounds per month), but I put a bit away in the account each month and forget about it.

Now. Popular wisdom tells us that saving while paying off debts is not a good idea - the interest you pay on your debts being inevitably greater than the interest a bank pays on your savings. But is saving while paying off debts still justifiable?

I got myself into fairly major debt circa-2005, as a consequence of bad fortune and admittedly poor money management, but I am now something of a reformed creditoholic. However, I still owe a couple of thousand on credit card, which I am steadily paying off. This is in addition to building up a small nest egg.

My justification for saving while in debt is two-fold:

1. It gets you into the habit of saving - something that many recovering debtoholics are not used to. And you begin to see how putting away a small, painless amount each month soon builds up, which might encourage you to do even more saving once your debts are repaid.

2. Supposing your credit cards or overdraft was suddenly taken off you (and this is what happened to many Egg customers a couple of years ago), how would you cope if you needed money for an emergency? With a few hundred quid in the bank you at least have a buffer.

Alvin Hall, in one of his personal finance books, advises people to save up at least 3 months' income as a form of financial insurance should the worst happen and you lose your job. This will take me a while, but it's what I'm aiming towards.

Would be interested in hearing others' thoughts on saving while repaying debts?

Johnny.

SueP19

I had a simliar "discussion" with someone when I first joined about 2 weeks ago.
On the one hand I totally understood their point, paying debts off saves interest BUT I have to say I agree with you. I have put aside a very very small sum for emergency repairs (car/house etc). We found that as well as spending more than we earned in the last 10 years, in an emergency we would use cards, vowing to pay back as soon as we could, obviously that day never came and the cards just rose.
So yes I plan to learn how to save for large items but later when I have made significant inroads into my debt

Johnny_Chaos

daily wrote: »

If you save, you are increasing your debt position to do it. Popular wisdom in this case is based on common sense.

I seriously doubt Alvin Hall suggests you borrow to build a cushion, Martin certainly doesn't - this is his quote

"I find it deeply frustrating that many people have both borrowings and savings at the same time, often with the same bank. Effectively it is lending you back the money you lent it, except charging you much more. Ridiculous!"


The habit of saving has a time and a place, when you are debt free (other than mortgage), or only have interest free debt which you will pay off as soon as the interest free period ends.

So would you advise somebody with, say, car finance to not save until the car is paid off?

I understand your point, and it is a point I have agreed with for a long time. Having thousands in savings while oweing thousands is madness; but I don't see the harm in saving up a small nestegg of perhaps a few hundred quid for an emergency.

Supposing a person was steadily paying off their debts, and their credit facility was suddenly taken from them - and then they had a financial emergency which required them to fork out a couple of hundred quid for car repairs or whatever, how would they cope? (A couple of years ago many Egg customers had their cards withdrawn. They still had to pay the balance - they just couldn't use the card.)

gizmo111

I think in the past people - myself included have paid down their debts and relied on available credit as an emergency fund if needed. Historically this has been a good move, but now and it's not just egg, many banks/card providers are taking away limits on a whim, so saving to meet the budget is essential.
Also if you are in a DMP/IVA etc then you have no chance of further borrowing so saving is a must.
And if you are on the debt free slog then having a little fund all for yourself gives you the boost to carry on, rather than thinking life is all about paying off things and doom and gloom.
You owe them money not your life.

Equally I think that saving huge amounts whilst in debt is not a sensible thing to do. But that excludes stoozing/offsetting etc

DaddyStaysAtHome

Allow me to be the dissenting opinion, because striving to be debt free while not preparing for the unexpected (which will inevitably come and sap your savings) is not a wise move in my opinion. Even if you are only saving a few dollars a week, you are building the habit of saving which is exactly what most people are lacking...the habit of paying oneself first. There has to be a balance...otherwise, why borrow in the first place? If you abide by the principal that you can't save a penny as long as you have debt, it makes sense to just save until you can purchase whatever it is that you want and forsake debt all together. Not really practical from my view point. Again, you should have a balance and stick to debt ratios that allow you to have a happy existence in my opinion.

E.

JOANNESAPHINE

I have been paying off debt while also putting a small amount away in my ISA. There is only £300 in there but I feel secure in the knowledge that if I have an unexpected outgoing I can fall back on that sum rather than putting that outgoing on my credit card which I would rather avoid now. I had a bad couple of years where nearly all my electricals broke down and had expensive car repairs which got me into credit card debt in the first place and has taken ages to pay off.

daily_2

If you had no ISA and no cushion, would you borrow £300 from your credit card to put into an ISA (effectively what you are doing)?

Whether to pay off car finance and loans depends on the apr, the repayment terms, and the rest of the financial situation. A small buffer is one thing, but funding it from a hefty apr overdraft or credit card for just in case scenario's, isn't sensible. The scenario of credit card or overdraft removal is more likely to happen if the bank sees no attempt to clear the debt.

http://www.moneysavingexpert.com/cards/pay-off-debts

Pay off debts with savings! The Golden MoneySaving Rule

"Those with both debts and savings are seriously overspending. The solution is simple; pay the debts off before you save, maybe even including your mortgage. And forget the old-style ‘must have an emergency savings fund' logic, getting rid of debts beats that too."

" The right thing to do is still pay off your debts with savings, including your emergency fund. Yet don't cut up your credit cards, it's important to keep the credit available in case of a substantial emergency"

mooomin

I have about £6400 in debts, and £600 in savings. Why?

My loan is on a fixed rate, and is the only debt I have left. My savings are going to be used to pay off the loan early as it doesn't allow overpayments. However, I will be able to use these savings if something goes wrong in the house or I have an unexpected event to pay for (My friend just announced she's getting married this September and I now have to pay for travel, accommodation etc as I'm a bridesmaid)

I will use the savings to pay off the loan, but I like being in the habit of saving and now know that when the loan is paid off the monthly repayment won't just be swallowed up in silly spends but will be saved properly.

Also, I feel that by saving a lump sum it is teaching me not to rely on my credit cards/overdraft for emergencies.

SueP19

daily wrote: »

I seriously doubt Alvin Hall suggests you borrow to build a cushion, Martin certainly doesn't - this is his quote from this very site.

"I find it deeply frustrating that many people have both borrowings and savings at the same time, often with the same bank. Effectively it is lending you back the money you lent it, except charging you much more. Ridiculous!"


The habit of saving has a time and a place, when you are debt free (other than mortgage), or only have interest free debt which you will pay off as soon as the interest free period ends.

Um, I think we have been here before Daily

Can I ask, WHY have you deleted your posts from our discussion on my thread SOA help, I did think it was a very interesting discussion re savings v paying debts.

Could it be that I made several valid points on this issue.

Note: Daily removed the threads to de-clutter my original thread, as he felt that they were not relevant to me

WorkingHardDFW

I don't save anything each month apart from what goes into my pension but we've still got a huge amount of debt (£11k). That said we do have an emergency fund in an ISA which we add to each time OH gets a bonus. This is our cushion and its nice to have. Its not got a huge amount in ( 1k) but its there if we need it.

Pre our LBM we did save a little each month and overpay our mortgage each month as well but we were overspending against our income and hence the £36k of debt we started out with.

When we are DF later this year I will be saving each month that is for sure but not until then I'm afraid.

SueP19

Just so you can read my reply I have posted it on here

" NO I would not borrow £1000 to have as an emergency fund. Why take money off a credit card and create an interest charge for the sake of it, after all, you would have a £1000 card with no balance on it for IF an emergency happened.

Have you ever made the choice between eating and repairing a car, its not pleasant. You need to eat but need the car to go to earn as well................................ps...a sack of spuds is very useful in these situations.
We have had crisis after crisis in our life, each time a credit card had to be used as no other funds were available. We never were able to catch up. If I am honest £200 is not a lot as an emergency fund. What if the bank rescind my OD without notice? This is happening and believe me if its going to happen to anyone it will be me. £200 can stretch to 2 weeks of fuel and food
And if you were not to have an emergency fund then why does the SOA website I used have a sub heading for it????????"

At the end of the day there are pros and cons of each approach and it will cost you more in the long run by having an emergency fund.

Johnny Chaos has made a very true point, we are living in an age when banks are struggling to make profits and reducing "risky" customers OD's or CC limits could greatly increase.

I do not believe that an emergency fund should be any more than a few hundred pounds.