UKC

Howdy

If you had the choice to either save or pay off debts what would you do?

I'm not concerned about whether savings earn any interest though.

My job is not all that stable right now, so i'm in a dilemma whether to save to add to any redundancy or to payoff existing debts, even though if I got made redundant next year I’d still have some of the debt left if I concentrated on paying it off.

Also, emergency fund, what would be the right ratio to what you earn?

Just interested in some views really

Jason

In reply to lone:

For me it depends on the debts. Something like a student loan I wouldn't bother as the interest is so low. If they interest is reasonably high I would pay that off first.

I am still paying my way out of debt from when I was in uni, mainly my over draft. Once that is done I will start thinking about an emergency fund, but my job is secure so not a major worry.

In reply to JoshOvki:

not that low, i think it was 5.5% when I looked last (awaits correction)

My first priority is to pay off all debts.
Id keep about £500 as emergency fund, anything more serious than that Id have to borrow from family or friends if possible.

In reply to lone:

I guess it depends on how much money you already have in your savings (if any) and what impact your debts would have on anything you want to do next if you get made redundant.

It's in my nature to want to pay off debts if I have any, but it depends, I guess. ()

In reply to lone:

I would pay off the debt, the interest is just wasted money IMHO.
I assume the debt agency is charging more then you are would gain by saving.

The deciding factor would be if you think you could get another job quickly, I.E. could you go down the road and get a job that week or would you have to faff around travelling to look for a new job. Do you think the redundancy would cover the second?

student loans interest rate is 1.5% for me at the mo, but it depends on when you started.

In reply to ow arm:
The interest on mine is 1.5% so about £150 a year, which isn't too bad. So I guess it depends when you started university.

(Beaten to it, I blame work)

In reply to lone:

I'd pay off as much debt as possible. Always get rid of debt ASAP.

As for the emergency fund, I'd aim for at least a couple of grand. More if you own your own house. At a bare minimum make sure you can cover getting the boiler replaced.

In reply to lone:

Depends on the interest rates applied. If you have credit card debt @ 25%APR then by paying that off you are in effect getting 25% interest on your money. If you pay off a student loan at 1.5% you're getting 1.5% on your money and you'd be better sticking it in an ISA @ 2% tax free then paying the student loan off as it falls due.

Emergency fund - I'd go with 1 - 2 months take home pay in an instant access account.

In reply to lone:

The general rule of thumb is that you should always pay of debts before you start to save. But if that leaves you with nothing, the other rule of thumb is that you should aim to have at least 6 months of salary in savings. My thoughts would be to pay off as much debt as possible but leave a little in reserve to handle those "sh1t hits the fan" moments like unexpected car repairs etc.

yea i have a 2% ISA, so its actually better not to pay off any extra of my 1.5% student loan.

In reply to lone:

If you are still going to have some of that debt with the associated monthly payments still needing paying with or without a job I'd concentrate on saving a bit to give you a buffer for a potential unemployed period. The logic being that if you have no job and no savings then you could end up defaulting, which looks terrible no matter how big the debt is.

If it's a student loan then it's not such a concern as no income = no payment. In which case you may as well split your spare cash 50:50.

In reply to gethin_allen:

Yer sounds realistic, thanks

In reply to lone:


Three months worth of net salary as emergency cushion in a easy access saving account seems a cautious amount to have.

In reply to lone:

Pay off the debt, and make sure to pay off the any priority debts in a higher proportion than the non-priority.

Make sure you have a fighting fund for possible redundancy, two months worth would help but also have a plan on what is essential spending and what is not.

Personally I would suggest that you conduct a full audit of your finances and spending asap. Make a truthful and accurate budget and look to it to plan savings (utilities, shopping and comms are the best places to start).

Look at the tools on Money Advice Service website and if you have concerns about the debt or would need help in making plans to pay amounts off then contact Payplan, Step Change, National Debt Helpline or Citizens Advice Bureau. All are free, confidential and independent sources of help and advice. (sorry to be full on, its kinda what I do for a living)

In reply to Pepper:

Thanks, and thanks everyone for the input - Jase

In reply to lone:

Who are your debts with? Can you negotiate different terms if you do stop earning for a while? Let them know in advance that there may be issues with keeping up payments if that looks likely.

Do you have family who could loan you, maybe interest free, if really needed?

Your emergency cash should be a multiple of your basic monthly expenditure. What expenses would you have in a period of unemployment (rent? mortgage? utility bills, phone / broadband? Fuel? insurance? etc)You should probably look to have at least three months, ideally six. Any idea how long it would take to find work (are you rural? specialised skills etc)

In reply to lone:

My general rule in an unstable situation is to hoard cash until the unstable situation is over, regardless (more or less) of the interest rate on the debt (unless its really silly like 100%+). The reason is that the cash is your safety net and keeps options open - you can always pay off the debt at a later date if the situation changes.

In a *stable* situation I would pay off the debt, starting with the highest interest debt first.

In terms of emergency fund, the ratio is not to what you earn, but to what your mandatory outgoing are. We try and keep 3 months in an instant access savings account, but that's because there's two of us and the chances of us both losing our jobs is slim. If it was just me on my own I'd want 6 months.

However, it depends on your situation. If you are insured against every conceivable eventuality, on 3 months notice at work and have worked there 25 years then your backup savings can be much less than someone on 1 week's notice with no long service.

In reply to lone:

Have only scanned the replies here but I'd make a couple of points. It is almost never worthwhile paying off a student loan early. You shouldn't think of this as a 'debt' but more as an additional tax. If you lose your job you stop paying it off so absolutely pointless to pay it off now with the prospect of potential redundancy. Far better to save that money instead.

Details here:

http://www.moneysavingexpert.com/students/student-loans-repay

Also some info about debt vs savings / emergency funds:

http://www.moneysavingexpert.com/savings/pay-off-debts

http://www.moneysavingexpert.com/family/recession-guide

Can really recommend the MoneySavingExpert site. Also check out MAS:

https://www.moneyadviceservice.org.uk/en

In reply to Edradour:

Much as I also quite generally like moneysaving expert, I think the advice regarding emergency funds is oversimplistic and actually dangerously misleading.

The advice is basically to pay off credit cards with your emergency fund because you can always use the credit card as the emergency fund later, if an emergency arises, and you are better off in the meantime.

This rather presumes that you are

(a) able to pay for the emergency with credit cards. This does not always apply. What if the emergency requires hard cash? Make a cash withdrawal I presume? However there are generally limits set to the amount that can be withdrawn as cash on credit cards. Hence if you need, say, 5k at a rush, in cash, then you may be screwed. Also, paying for an item of size (like, say, a car) on a credit card is likely to attract a fee which may or may not outweigh the interest savings by paying off the card with the cash.

(b) that your provider does not do anything unpleasant with either your card or your credit limit. Whilst admittedly unlikely, I'd rather the control of my emergency fund was in my hands rather than in the hands of a bank.

In reply to John_Hat:

Actually completely agree with you on this.

The site is excellent for general advice and then, once a bit better informed, you can pick and choose which to take.

The MAS site seems to recommend an emergency cash fund, something I have too, about 3 months wages worth.