Should I put money aside in a "pot" for car expenses, or should I pay back credit card?

BarefootAdventures · 16 February 2019 at 9:50PM

So I have read up on the advice to not have savings and debts, I get it. Completely understand the example of not having emergency savings if you've also got debts.

But I'm getting a bit confused about where the line is I guess.

We have a separate bank account where we're putting aside money for "car stuff". My partner arranged for £125 per month to go into it. Its to cover both expected and unexpected costs. My question is: is it better to pay off debts or to save for things that we know are coming?

And if it's better to pay off debts, even if we'll then need to spend that money on the credit card in a couple of months, is it better to just put all of our income for the month onto the credit card and have the outgoings from there instead of the current account, because it'll save a couple of weeks interest? Or is that too far? Where's the line?

jonnygee2 · 16 February 2019 at 10:10PM

There's no specific line. The question is, which course of action leaves you with the most money?

If you have a 20% interest credit card, then of course paying it off is going to be beneficial, even if you go back into it in a few months, you'll have saved a good amount of interest.

If it's a 0% card, I guess that can be different, but you'd still be best to reduce the credit card debt where you can, because it may not be 0% forever.

is it better to just put all of our income for the month onto the credit card and have the outgoings from there instead of the current account, because it'll save a couple of weeks interest? Or is that too far?

That'd be a poor idea, because you might need cash or to do a bank transfer, which of course you can't get from your credit card (without a lot of fees). The advice is to pay your debts before saving.

But, basically, always pay off your debts first. Every penny of interest you can save is extra money you have to spend, and the cost of debt is almost always higher than the interest on savings.

enthusiasticsaver · 16 February 2019 at 11:16PM

I would always say you need emergency savings so your car maintenance fund should stay so you always have access to money for car repairs. What I would say though is when it gets to £500 or £1k then maybe redirect the money towards repaying debt.

trailingspouse · 17 February 2019 at 10:05AM

How much would you reasonably expect to have to pay out for car 'stuff' in the forseeable future? Once you've saved that amount, direct the rest to paying off your debt. Yes, you should save for things that you know are coming, and a bit on top for the unexpected (but reaslistically, how many unexpected things - that aren't covered by insurance - are likely to happen in, say, the next 6 months?).

Terry_Towelling · 17 February 2019 at 2:43PM

Tricky one with no right or wrong answer, but surely, if the car expenses are the sort that could be paid by credit card, and your credit card debt has a higher APR than your savings, it makes more sense to put that £125 into a credit card payment than into a savings account.

Imagine a CC APR of, say, 15% vs a savings rate of 1.5%. The savings rate will generate about 16p per month for every £125 deposited but overpaying the CC debt by the same amount will save £1.60 per month in interest. If your CC rate is even higher than 15%, the savings differential is even greater.

The balancing factor will be the utility of a savings pot to pay for unexpected things that might not be coverable by credit card - but if you still feel the urge to save the £125, try to put it into an easy-access regular saver paying up to 5%.

My view, for what it's worth, is that the benefit of overpaying the credit card each month is better than the pot of cash and, in the longer term, the card debt (which sounds considerable if both your incomes could be paid into it without clearing it) will be cleared more quickly and you will then be able to save. On top of that, as others have said, what sort of problems are you foreseeing with the car that are likely to need significant sums of money?

Should I put money aside in a "pot" for car expenses, or should I pay back credit card?

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