Pay Off Debts With Savings Article Discussion Area

Former_MSE_Archna

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Pay Off Debts With Savings Article

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southernscouser

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

BUT

I have savings! :eek: :rotfl: Well £300 of Premium Bonds. :rolleyes: 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

Kevicho wrote:

"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?

Kevicho wrote:

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.