Saving and Borrowing
According to IFA Promotion's Savings Brake Data, for every pound saved, we’re borrowing 27 pence. This is down from last year's borrowing per pound of 69 pence, but reveals that most of us try to strike a balance between using our savings and borrowing money to finance our lifestyle.
So which is the most sensible financially? Obviously funding purchases and your lifestyle with savings is the most cost-effective way to use our money. If you needed £10,000 for a new car and had £10,000 saved in the bank, it's a no-brainer that you'd be better off spending your savings on the car (so the purchase costs you £10,000 plus any interest you would have earned had you not used your savings). Whereas, if you borrow, the car would cost you much more than £10,000 as you'd pay interest on the amount borrowed. However, you might need some or all of your savings for something else, or may need to use your savings to ensure good cash flow over certain months, in which case a combination of savings and borrowing might be the best financial solution.
Similarly, you may find that you have more debts than savings, or have fairly low interest borrowing that you are able to stay on top of, in which case, it might also make more sense to fund purchases using a combination of savings and borrowing.
To figure out whether saving, borrowing or a combination of both are the most effective methods to fund your lifestyle, total up your savings and your debts. Remember, debtors charge much higher interest than the interest you receive on savings. But credit interest is generally subject to income tax. Weight up the pros and cons of using savings to clear debts or fund new purchases, or whether a combination of both is the best solution.
The majority of us prefer to use their salary to make monthly payments toward debts and keep their savings for our next holiday or a 'rainy day'. This is fine, although the aim should always be to increase savings and reduce borrowings. But, if you have far more debt than savings, or have low interest loans that you can easily afford the repayments on, it makes financial sense to manage your debts and finances in this way.
However, it also makes financial sense to use savings to pay off some form of borrowing, particularly on any borrowing you have with high interest or flexible interest, such as credit cards. It is much more financially sensical to use savings to pay off as much credit card balance as possible, rather than pay high interest on that borrowing. And this is a good way to use savings to save on high interest added to your borrowing. Some debtors and credit card providers will enable you to sink savings into your borrowed balance and then retrieve those savings as and when you need them. Sure enough, some mortgages even provide the chance for customers to use savings to clear some of the mortgage and then retrieve those funds as and when they are required.
However, most loans do not offer this kind of flexibility and instead have early payment settlement figures and penalties, discouraging early payment (after all, they make the most money if you complete the full term at the interest rates they've laid out and loan providers are in business to make money after all). Furthermore, once you use savings to pay off any loan borrowing, you cannot retrieve it.
Advice
Advice: How to stay out of Debt
Advice: Manage your Debt
Advice: How to manage your money and get out of debt
Advice: Saving and Borrowing
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