Debt before savings?

Firewalker

Hi there, I have calculated that while one has debt (excluding mortgage) one should have £1,200 emergency fund (and this is really cor emergencies and should be topped back up if used). Anything after that should go on consumer debt. Once consumer debt is gone my opinion is that one should build serious contingency belt - in the region of £15,000 - that should be liquid. Once this is in place, 'savings cxan be split between 'investments' and overpaying the mortgage.

FW

Million_Percent

What the OP is decribing is not really saving. It is simply sensible budgeting for known upcoming expenses. Just because those expenses occur annually rather than monthly it doesn't follow that the money you put aside to cover them is 'savings'. If you put that money toward your existing debt then when those expenses come up you simply have to get back into debt to pay them. Far better to learn to live within your means by correctly budgeting without reliance on credit.

Just keep doing what you are doing OP.

mrsb83_2

I agree that the OP is budgeting, not saving. I have £1000 in a 'savings' account which is for annual insurances, car tax, essential household repairs etc. I haven't got a minimum/limit for the account, it just has what I need in it. Were I to pay it against debt I'd find myself in trouble quickly.

fd1972uk

Tbh, this is something I might need to re-jig.

We technically don't have savings, we do put a small weekly amount towards our little girl's savings account.

We also put another £15.00 towards stuff like Birthdays and help for Xmas.

However one thing we don't do is keep money away for emergency (yes, the birthday/xmas money could be dipped into, although it's bare at the moment).

However I currently take a workmate to work (and back), he contributes £10 per week towards petrol. Having already costed the £60 per week for petrol, I think I'll use his £10 and put away so that I have it towards any car problems, tyres, mot etc. It could also be used in an emergency outwith the car.


FD

jamesd

gavinchappell wrote: »

However, would I be better off putting ALL my spare money onto the loan, and then when things like car insurance come around putting those onto my credit card and then going back to paying the minimum monthly payment on the loan while I settle the credit card?

Yes.

gavinchappell wrote: »

To my mind, I would be better off being able to pay those bills straight off with money I have available in savings, but my credit card is currently around 1.3% lower interest-wise. Does this mean I'd be better off putting as much money as possible into the higher interest rate loan, even if that means loading my card up a few times a year?

Yes.

But you have a better option: get a 0% for purchases credit card and use that for all possible normal spending to accumulate a balance on the card that has no interest. Use the money not being spent to reduce the loan balance. Pay the pending bills with the 0% card. The effet is to gradually transfer the debt from 8% to 0%.

If you haven't cleared the loan and the 0% card by the time that comes due, seek either another 0% for purchases card say six months before the end of the deal and repeat, or seek a 0% balance transfer card.

You could also start with a balance transfer card like those from Virgin or other MBNA providers that lets you balance transfer from a current account, which sends money to the current account. This could save you money even with a 4-5% fee. It's of interest mostly if you don't spend at a high enough rate to rapidly accumulate money on a 0% for spending card that would let you pay off the loan.

The mortgage borrowing is much cheaper and that's not sufficiently expensive to deter you from accumulating both savings for normal variation and a significant emergency fund. It's also worth considering whether investing rather than additional mortgage payments is better suited for you - it offers returns greater than the mortgage interest rate long term but some people like the certainty of mortgage payment even though it makes them less well off than investing. So each person picks their own preferred combination.

jamesd

fd1972uk wrote: »

However one thing we don't do is keep money away for emergency.

Yes, you really should. Even though it means that you're effectively paying loan interest on the money that you keep for the emergency. You just can't be certain of using credit in an emergency.

What you can do is look to get a 0% for purchases card deal that has an end date at least a few months different from the end date of your current deal, to give you time to replace deals rather than having both becoming interest bearing at the same time. I'm assuming that the loan you have allows partial overpayments under the current rules, or just because the lender allows it, rather than restricting you to only full repayment. Then switch all normal spending to the 0% card and use the money not being spent yet for loan repayments or accumulating an emergency fund or a bit of each.

If the loan is full repayment only it's more interesting planning to accumulate enough money to clear it and leave yourself better off. Often possible, but depends on the time and numbers.

gavinchappell

Plenty of interesting points there for me to think about. My loan allows partial repayments at any time, and I believe is daily interest calculation so as soon as a payment clears I'm instantly slightly better off (not 100% sure on that but could find out). I've had 0% cards and my problem is that I don't have "the right mindset" for it, I find myself spending more than I intend to because "oh, it's 0% and it'll be cleared". I got bitten by that before, I got a 0% card to fund some car upgrades/repairs with the intention of treating it like a cheap loan. And while it worked in that I kept up the required payments to clear that cost, other things snuck on and I didn't increase the payments as required so when the deal expired I still had a considerable balance. So, perhaps counterintuitively, I'd rather have debt with an interest rate attached as it makes things really click in my mind that it's costing me money and far more careful about adding to it.

As far as true "emergency" money goes, I'd also forgotten that at the moment I'm putting £20/month into my daughters bank account (not Child Trust Fund as myself and her mum are no longer together and I would prefer to keep my contributions entirely separate just in case). So as a last resort I would also have this money available, although I think it takes both myself and my mum to withdraw any money so I can't just "dip in" willy-nilly.