How much better off would I be ??

KarateKidWaa

Hi there, can someone with more maths skills than me work out how much better off I would be if I changed my plans towards my debt/savings.

I have 7 debts, each are fairly recent (since xmas) totalling £10k. (Still almost 5 yrs to pay)
The APR on each is 25% (High I know, but I cant get any lower right now)

I am in a position where I can afford the monthly repayments, as well as put money aside. I was going to just put £50 in a savings account each week earning 5% interest, but then I thought I could probably make more money if I threw this right at the debts and then put the money saved when im debt free a year early into a savings account, plus the additional £50 a week.

Could someone work out the difference?
I worked out that including compound interest in 5 years of savings account £15084.97 (is this right)

What would that be if I paid off all my debts early then put it into a savings account for the same term? I dont think it will be quite so high but I think it will be advantageous as I will be debt free abit earlier?

I really dont know how to work this out it boggles my mind... and im toying with which way to go whether to get £15084.97 saved up in 5 years as well as my loan payments paid off at end of term.. or paying off early and getting money in the savings account?

cat4772

Hi KaratekidWaa

If you go to whatsthecost.com and look at snowballing your debts it will tell you how to pay them off so that you are paying off your debts faster (paying highest APR first and overpaying that).

It will also give you a clearer idea about your debt free date; though there is something to be said for paying off a small apr and small debt to reduce the number of cards you're better off financially to pay off highest APR debt first.

Good luck.

Cat.x

~Beanie~

I can't do the maths either but I really can't see the benefit of putting away £50 per week and earning 5% on it when you are paying 25% on your debts.

To me it would seem more sensible to throw the extra £50 at the debt, repaying it sooner and reducing the total amount of interest paid.

KarateKidWaa

Think your right, I used the snowballing calculator but im not sure if I used it properly.. as the debts I have cant be overpaid but they can be paid off (with a 1 months interest penalty).. I did it as if they could be overpaid though and it said I can be debt free in 28 months and I worked out I would have £17329 in savings in 5 years time... even if that figure isnt quite accurate, its more than if I didnt do it so I think id save about £1k doing it this way, definately going to do that me thinks!

Clariman

Hi KarateKidWaa

Leaving aside the penalties for early repayment and simplifying the maths somewhat, I can't see where you get your numbers from.

If you save £50 per month for 5 years, you will have saved £3000 before interest is added. Given that you are paying the money in monthly, then the average balance during that time will be £1500. Applying 5% interest compound would give you about £414 in interest before tax. So if you are a non-taxpayer, then your savings account should have approximately £3414 in it in 5 years time. If you pay standard rate tax on your savings interest then the net interest would be £331, so your total balance after 5 years would be £3331. I don't know where your £15084 comes from I'm afraid.

If you reduce your debt by that additional £50 each month, then that will be far more beneficial. Taking the same £3000, then during the course of the 5 years your reduction in debt will be £1500 on average during that time. 25% compound on £1500 is £3077 in interest alone. So add that to the £3000 you saved and your debt savings would be £6077.

So that same £50 could earn you £3414 if you saved it (assuming you are a non-taxpayer) or it could save you interest of £6077, so you would be £2663 better off by using it to pay off your debts.

Now I don't know your circumstances but 25% APR on debts of £10,000 is going to grow very substantially if you don't make a big dent on it. If you make no payments on it, the debt will triple to £30,000 in 5 years time at that interest rate. How much are you planning to pay on that debt each month?

Clariman

KarateKidWaa

Hi Clariman, dont think you read my post properly.
I can put away £50 per WEEK, not month. = £2600 a year.

Also I have no problem making the monthly payments of £305 either.

Clariman

KarateKidWaa wrote: »

Hi Clariman, dont think you read my post properly.
I can put away £50 per WEEK, not month. = £2600 a year.

Doh! :embarasse

Using the same logic as my previous post, but taking it as weekly!....

Savings account at 5% you would have approx £14795 in it in 5 years time if a non-taxpayer, £14436 as a basic rate taxpayer.

Using it to reduce your debt, then it would be £26,336. So in that time you'd probably have paid your debt off and started saving again, so those figures are a little academic.

In short, though, you'd be much better off paying off your debts first.

Clariman