Advice on paying debt with savings

b248

Just after some advice really!!!8230;or rather, I think I know what the right answer is, but seeking validation I guess!!!8230;

I had my lightbulb moment two weeks ago when I finally did a full 3 month spend analysis and used the budget tool to confirm that my partner and I are spending more than we earn each month by a fairly significant amount.

She previously owned a flat which she sold and we are hoping to get a joint mortgage in the next year or two (when she will have sufficient years of accounts for being self employed) but currently renting. We have a child who is 1. We are both working !!!8211; I!!!8217;m employed and she!!!8217;s self employed, both on good wages although hers fluctuates. We!!!8217;ve made some poor financial decisions in the past though, especially her, meaning that in the last four years our debt has rocketed and our savings from her flat sale have reduced.

Combined we have debt of around £40k which is a combination of £30k on credit cards (some rolling, some longstanding; some benefiting from zero interest transfers, some not) and £10k bank loan.

Fairly ridiculously we also have £130k in the bank but she is reluctant to use this to pay off our debt for a few reasons:
- It was originally inheritance after a parent!!!8217;s death so she feels guilt and sentimentality about it
- It has already reduced significantly since the flat sale due to our poor financial decisions
- She is worried about the reduction in lump sum to be used as a deposit when we buy (even though we would have to pay off most of our debt to be approved for a mortgage anyway!!!8230;!)
- Denial about how long it would take us to pay off the debt without touching the savings, possibly, given we are overspending already

So my question!!!8230;We obviously have a way to go to reduce our spend and we are getting to work on that. But would it make sense to pay off ALL the debt in one go with the savings and start from scratch? Or would it be equally as sensible to do 0% interest balance transfers for some of the total and pay off the loan and part of the debt? What do I need to consider to determine this if it isn't an immediate 'pay off all the debt now!'

I have a very good credit score, hers was poor several years ago after she missed some payments before consolidating her debt, but has risen somewhat now. So even if we paid off the total we would be able to keep some credit lines open for emergencies.

(Apologies in advance that this will seem, to some, a ridiculous dilemma. I know compared to some people we are in a very strong position. It just feels stressful as we have allowed ourselves to increase our debts and reduce our savings significantly in the last few years so we have a lot of work to do to make sure we don't continue to waste our savings and increase our debt )

National_Debtline

Hello b248 and welcome to the forum.


At least some of these debts are currently incurring interest, and (I would assume) will be growing at a faster rate than any interest being earned on the savings. On that basis alone, it would make sense to clear those ones as they are currently depleting your net wealth.


Dennis
@natdebtline

19lottie82

I understand the hesitancy but if the APR of the debts is higher than the interest rates on the savings then it really is a bad descision not to use the savings to pay off the debt.

In layman!!!8217;s terms emotions are costing you money.

Pay the debt off with the savings and then contribute a fixed amount each month until the savings are topped back up again.

However it is important to reduce your spending / increase your earning so that you!!!8217;re not spending more than you earn and the debt doesn!!!8217;t accumulate again.

System

The temptation is to always keep money in the bank just in case, rather than use it to pay off debts. It's natural, as soon as you use the money, the debt is gone, but the money is gone too, meaning any emergency may be a problem. In your case however, you've got plenty of extra money so I wouldn't hesitate paying it off.

Ilona

Hi. Seems crazy to me to have £40k of debt, and £130k savings. You could pay all of your debt off with it, that's like borrowing it off yourself. Clear the decks, then start paying the amount you would have been paying, back into the savings account.

In the meantime you need to think of this new way of saving as a commitment and not fritter it away. Complete a Statement of Affairs, go through all your spending, and put saving as a priority.

I regard money as just numbers, I'm not sentimental about it at all. It has to work for me, however much or little I have, where ever it came from.

Ilona

Raven42

OP is correct though, on the face of it paying off the debt is the done thing but it is useless unless they change their spending habits. In a few years there is another £40k to be paid off for example.

Too many of these replies seem to think the answer is straight forward but it's not much different to taking out a consolidation loan from yourself and these boards are littered with the often negative impact this can have.

The other issue here is who's name is the debt in? If you've shared it then only £20K is your partners and 100% of the £130K is theirs from what you've written.

Best of luck

Bored

I think a good compromise would be to pay off the £40K debt and commit to repaying 'yourself' by taking a hard look at your spending and building the savings pot back up. That way you don't have to worry about the debt and the interest but you still hold yourself accountable.

theoretica

Mathematically, paying off the debt with savings makes the most sense. But will you have emotionally learnt your lessons about budgetting? I see your first priority as sorting out your spending, and doing this at a level that lets you pay back the borrowing (whether to the lenders or back to your savings). Hopefully this will drive home the lesson that overspending is borrowing from your future selves.

datlex

Personally I paid off my debt with my savings. I then used the amount I would have paid in debt to save. I am now in position where I can afford to buy a place rather than renting for the rest of my life, which would not have been an option should I have stayed in debt.