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Save Or Pay Off Your Debt?

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Save or pay off your debt?

Thursday, May 11, 2006

(Taken from: The Metro)

Millions of people are facing financial disaster because they are refusing to use savings to pay off their debts.

With personal debt increasing by £1million every four minutes in Britain, is it better to save our extra cash or use it to pay off what we owe? Spiralling personal debt is becoming a 'potentially large social problem', the Bank of England governor warned last week.

Mervyn King said it was clear that people were getting into difficulty with their debt repayments as the National Debt Line revealed that more than 105,000 people asked for help between January and April – more than 30 per cent higher than the same time last year. The average debt on overdrafts, credit cards and loans, excluding mortgages, is £7,751, according to personal debt counselling company Credit Action.

Yet, according to National Savings and Investment's quarterly survey, the average person is also putting away nearly £86 every month into savings.

That contradiction has also been backed by the findings of AXA Avenue, an experiment launched last November to see how the nation's debt problems could be changed using financial education.

It estimates that more than 12.2million people are refusing to redirect savings to service debt and are facing financial disaster as a result. AXA Avenue's independent financial adviser has been helping ten families in Brighton to sort out their money problems.

After 12 weeks, a plan of careful budgeting and consolidation of exisiting loans reduced the group's debts by £12,000. Six months down the line, the savings have increased to £31,000. A survey of more than 2,000 people carried out alongside the experiment by market researchers TNS revealed that a quarter were trapped in a dilemma of whether or not to pay off their debts or save some of their income for emergencies like redundancy.

If that is reflected in the population, then one in four adults saving and borrowing would be ploughing £2billion into savings accounts every month while overlooking the £57billion they owe in unsecured debt.

The worst affected are 25-34 years olds, who owe an average £9,345 on credit cards, loans and overdrafts. This costs them around £87 a month to service if they just repay the interest. Yet, at the same time, the same group of people were saving an average £307.01 per month, which would make nearly £17 on average if it was invested in savings accounts, cash and investment ISAs.

The average person with around £7,600 worth of debt would be spending more than £71 a month paying interest, but would be able to earn £12.12 on average monthly savings of £221. Overall, for every £1 of interest earned on short-term savings, people had to pay £5 in interest accrued on their debts.

And, by redirecting their savings for just two and a half years, they could clear their debts entirely if they consolidated into a low cost loan and didn't spend any more than they could afford.

AXA Avenue's independent financial adviser Saran Allot-Davey said she helped households plan savings but only once debts were under control.

She said: 'It's great that so many people are saving on a regular basis. But a lot of people who are saving money over and above clearing their debts are paying high charges, instead of redirecting savings in order to be debt free.

'Our attitudes to debt and saving seems to be at odds with each other. On the one hand, we feel compelled to save because it makes us feel more secure, yet we are comfortable with increasing levels of unsecured debt, because it's regarded as the norm.'

Graham Lund, of Call Credit, said: 'In general, it makes financial sense to pay off debt before saving, because only making the minimum payments on credit means that it can many years to clear.

'At interest rates of between 12 and 15 per cent, it can also add thousands to your original debt, especially if payment protection insurance is included.'

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I think it reflects ignorance in consumers - and markets have always exploited that

I've always transfer cash to debt as soon as possible - I'm not paying somebody a portion of my already taxed income

Edited by dnd

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I've always transfer cash to debt as soon as possible.

It isn't always advisable to pay off debt straight away. Just most of the time.

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"why put cash into debt ?

then you pay interest and earn none ?"

I think the point the articles is making is that by putting cash saved into reducing debt, the enslaved would get to pay less interest.

The saving of the interest not paid far outweighs the benefit of the interest earned if the cash is saved.

Particularly if you include the taxation of any interet earned.

Therefore all things being equal, it makes sense to pay of debt first, to optimise the outcome.

However, this ignores the opportunity cost of having no savings and an external shock such as redundancy.

Therefore, consumers are behaving rationally in building up a savings pot, before paying the debt in order to have an emergency reserve.

The more interesting question is what level of savings is treated as neccesary since there is an opportunity cost in extra interest payable to the lenders.

My analysis above of course ignores the outlying examples of people borrowing with absolutely no intention to repay etc..

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However, this ignores the opportunity cost of having no savings and an external shock such as redundancy.

Therefore, consumers are behaving rationally in building up a savings pot, before paying the debt in order to have an emergency reserve.

repay etc..

But wouldn't you be in a much better position if you don't have debts to service?

Part of my reasoning when getting rid of my debts was that I was a slave to them, it limited my life to a large extent. If I was made redundant with debt I would have been under pressure to take a much higher paying job to keep the repayments up but with no debt all I had to do was earn enough to survive.

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But wouldn't you be in a much better position if you don't have debts to service?

Not if you couldn't borrow money to live on due to not having a job.

However, if you are made redundant and have savings, odds are you can't claim much dole money even though you've been paying taxes for years and chavs who've never worked in their lives can do claim far more. So blow it on loose women and fast living, or pay off your debts.

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It isn't always advisable to pay off debt straight away. Just most of the time.

Yes, I INSTANLY pay off ALL my debts as soon as I accrue them :rolleyes:

But, I suppose some people do need to be put down helped interpreting that statement...

Edited by dnd

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Not if you couldn't borrow money to live on due to not having a job.

However, if you are made redundant and have savings, odds are you can't claim much dole money even though you've been paying taxes for years and chavs who've never worked in their lives can do claim far more. So blow it on loose women and fast living, or pay off your debts.

A friend of mine has been made redundant 3 times. Each time he has had to watch his redundancy slowely reduce until he can claim any benefits, including his various insurances kicking in. He can't claim on his mortgage insurance until he is signing on and he can't sign on while he has £10k redundancy money.

Swings and round abouts in a redundancy scenario I think. You either have debts which stay the same while your savings get eaten or you aquire new debt, the net result at the end of it is the same.

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A friend of mine has been made redundant 3 times. Each time he has had to watch his redundancy slowely reduce until he can claim any benefits, including his various insurances kicking in. He can't claim on his mortgage insurance until he is signing on and he can't sign on while he has £10k redundancy money.

Swings and round abouts in a redundancy scenario I think. You either have debts which stay the same while your savings get eaten or you aquire new debt, the net result at the end of it is the same.

You can claim Job Seekers Allowance based on your contributions made (rather than income based). That doesn't take into account any of your personal wealth, rather measures what NI contributions you have made.

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The problem is folk are not considering debt as real money - the sort you work to earn. They would rather save the worked for money and ignore the debt.

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There are people who borrow thousands ona crediot card at a zero % introductory rate and keep moving the debt from lender to lender.

Fair enough if they are sensible but most of them can't keep their cards in their purses/wallets and so the debt gets out of hand. Before they know it they are unable to pay the minimum monthly replayment and new lenders won't touch them with a barge pole.Imagine the problems if such people have several cc's and every store card known to man!

I'd say pay off debts, and if possible avoid credit cards in the first place. Overpaying a mortgage will save an awful lot of money in the long run.

Saving money could work out better but it would take a lot of effort and you'd need plenty of will power not to spend it.

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to not be able to get any JSA, you would have to have savings of more than £16k (was £8k until recently) and not have paid any NI contributions for the last 2 years. Even then, you may be able to claim council tax benefit and possibly housing benefit if you rent. And to be honest, if you do have more than £16k stashed away, do you really need to claim a poxy £55 a week?

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I have a hefty mortgage, and a savings account.

You might think I ought to use the savings to reduce the mortgage, but I'm paying 4.19% on the mortgage, and earning 5.03% on the savings (tax-free; in my wife's name).

What I actually do is wait for the 2-yearly remortgage date, then reduce the amount I borrow.

Even though it makes more sense to keep all the money as savings, I still like to feel my mortgage is reducing.

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And to be honest, if you do have more than £16k stashed away, do you really need to claim a poxy £55 a week?

It's not so much the money thats the problem but the fact that any payment insurance you have on credit cards and mortages don't pay out unless you have proof you are signing on.

Thinking about it I think that the reason he didn't claim straight away is that when claiming JSA you have to take any job offered to you if you are fit and able. He didn't want to be in a situation where he couldn't attend interviews because he was busy working at Sainsburys. Sure you can delay and mess around but he would rather have 5 months solid job hunting than risk getting nothing.

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Thinking about it I think that the reason he didn't claim straight away is that when claiming JSA you have to take any job offered to you if you are fit and able. He didn't want to be in a situation where he couldn't attend interviews because he was busy working at Sainsburys. Sure you can delay and mess around but he would rather have 5 months solid job hunting than risk getting nothing.

Fair enough, although there is a way around that. When you first make your claim you are asked what you are interested in doing. Say admin for example and then 2nd choice, 3rd choice etc. You are normally given around 4-6 weeks to look for work for your first choice, then they will expand it to your 2nd choce, and so on. Although how hard they push you to take a job you are not interested in would depend on which Jobcentre you are signing on at, probably!

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I have a hefty mortgage, and a savings account.

You might think I ought to use the savings to reduce the mortgage, but I'm paying 4.19% on the mortgage, and earning 5.03% on the savings (tax-free; in my wife's name).

What I actually do is wait for the 2-yearly remortgage date, then reduce the amount I borrow.

Even though it makes more sense to keep all the money as savings, I still like to feel my mortgage is reducing.

If you have the will power not to spend your SAVINGS then you are onto a winner.

To others, savings means ready cash.Have you considered a one account. It would be interesting to see how quickly you could pay off your mortgage with them compared to saving a lump sum and paying your mortgage off that way.

They do have a calculator which I checked only Sunday and it could work out financially viable - again only if I had the will power not to take mortgage holidays or let my missus find out my account details :D

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If you have the will power not to spend your SAVINGS then you are onto a winner.

To others, savings means ready cash.Have you considered a one account. It would be interesting to see how quickly you could pay off your mortgage with them compared to saving a lump sum and paying your mortgage off that way.

They do have a calculator which I checked only Sunday and it could work out financially viable - again only if I had the will power not to take mortgage holidays or let my missus find out my account details :D

One accounts (and similar) have higher IRs than fixed ones. I'm not convinced they're all they're cracked up to be but it's been a while since I looked into this.

Edit: It might make sense if you have all your savings in the bank and pay higher rate tax. I'm thinking more along the lines of investing to make... let's say a long term average of about 9%. Then I'm better off having a large fixed rate mortgage and not paying it off with my savings.

Edited by Nijo

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  • 339 Brexit, House prices and Summer 2020

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      • down 5% +
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      • up 5%



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