Pay Off Debts With Savings Article Discussion Area

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 (:rotfl:) 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... :rotfl:

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...:p

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

desperate_saver wrote:

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 :eek: 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

desperate_saver wrote:

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...

desperate_saver wrote:

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.

Emmzi

I'm still going to disagree for those (like me) who contract/ temp... and may need 9 months living expenses between jobs. Borrowing the money in times of unemployment is, at least the way I see it, fraud - I've no known means of paying the debt back, just a 'hope' that I'll get another job soon.

If I were in secure, permanent employment, I would use all my savings right away to pay off my debt, no arguement. But when dole is not enough to repay my mortgage for the 9 months it takes interest relief benefit to kick in - I need to know I can go for 9 months!