Debt

Should you use Savings to pay off debt?

There are many people that have debts but they also have savings as well. Some people think that they should use those savings to pay off the debt but others like to have some money to fall back on. Which is the best to do?

Firstly, it will depend on the type of debt you have and how much you have in savings. If you have good debt like a student loan or mortgage then it is not always wise to pay it off early. You will probably not have enough savings to clear the debt anyway. Even if you do have enough money, it may be better to invest it and you may get more from the return on the investment that you are paying out in interest payments on the debt. However, you need to make sure that you do not take too much of a risk with the money as you may find that you lose some or all of it and that would not be good.

If you have a very expensive debt such as a short term loan, credit card or overdraft then it makes sense to get them paid off as quickly as possible. The interest rates will be really high compared with what you can get in a savings account and even with a good investment account and so it is worth paying it off. You may worry that you will have nothing to fall back on if you do this, but you will still have your overdraft and credit card that you can use in an emergency. However, if you pay it off, it will be a lot cheaper and you may not even need to use them anyway. The only thing to watch out for is early repayment charges so make sure that you calculate how much they will be and check that it is still worth paying off early.

If you are saving up for something specific then the decision can be more difficult. You have to consider whether you are prepared to give up what you are saving for in order to clear debts. Only you can make the decision as to whether clearing the debt is more important to you or the item you are saving for. It may make financial sense to pay the debt and then start saving again. Without the interest to pay you will be able to afford to save more money and you may still be able to get what you want as quickly anyway. You will also have the joy of knowing that you saved up for something and could have it and you paid off your debts. This can be a great feeling.

Although it usually makes financial sense to pay off expensive debts with savings, the decision is not always about the cost. Some people like having savings to fall back on. There are people who even take out a loan to top up their savings account as they like the security of having money there. Although this does not make financial sense, if it gives them peace of mind, it could be worth it on a personal level to them. So it is not always a simple decision. However, do not be influenced by other people telling you it is worth having money to fall back on. Banks want us to do this so that we have debts and savings and they make more money out of us than if we pay off our debts and have no savings. So the thought that we should always have some savings probably came from them all along and does not financial sense.

The decision is also made more difficult by the fact that some debts are more worth paying off than others and it is not always easy to decide. An expensive debt that will just keep gaining interest such as a credit card is worth paying off, but a student loan may not be. In the UK you only have to pay back a student loan if you earn enough and it gets written off after a number of years. If you pay it back early then you may end up paying more, than if you just pay what is required each month. You need to carefully consider each debt and think about whether it is best to pay it off.

It is also worth thinking about the amount that is owed. If you owe a lot of money then putting a small amount of savings money against the loan may not make a significant difference. However, if you only owe a small amount you may be able to clear the debt or pay off a significant chunk of it and that could make a big difference. If you just compare how much you are getting in interest on te savings compared to how much you are paying in interest on the debt, that should allow you to make the right decision.

Mortgages

Is it Worth Repaying your Mortgage Early?

A mortgage is a very long term debt often lasting twenty five years. Although the interest rate can be lower than short term loans, because you pay it back over such a long time, the cost of the loan can be really big. This obviously can depend on the interest rate but you can end up paying double for your home by the time that you have repaid the loan and in real terms, that is a lot of money. This is why a lot of people consider repaying it early.

It can be a difficult decision though and it is worth considering it hard before you do it. It will be lovely to have that feeling that you now own your home and not the lender and that you no longer have that big mortgage debt hanging over you. The feeling of freedom could be massive for many people. A lot of people do not like the idea of being in any debt and although a mortgage debt is considered to be good debt and you normally get something positive out of it that will end up making you money, it still does not sit well with everyone. It is worth remembering thought that you will get that feeling eventually even if you do not pay it off early, as long as you do pay it off by the end of the mortgage term.

A big advantage of paying it off early is obviously the money that you will save. Although you may have to pay an admin fee to pay it off early, it is likely to be very small compared with how much you will need to pay for the extra years of interest payments on the mortgage. It is very unlikely that if you save the money instead, you will get a better return compared to how much you will save on mortgage interest payments. This is because banks lend money at a higher rate than they pay out in interest. If you invest the money, you could make more back, but you will take a risk. An investment could lose value as well as gain value and this means that you could find that when it is time to pay off the mortgage, there is not enough money to pay it off with. This has happened to a lot of people in the past who had interest only mortgages with endowments and they found that they were not making enough money on their investment to pay off the mortgage and had to bump it up towards the end of the mortgage term. Whether this happens will depend on the economy as well as interest rates, the stock market and the funds that you choose to invest in. There are many unknowns here so it is always wise to do a lot of research and possibly talk to a financial advisor before investing.

If you pay the mortgage off early, then you may possibly regret it later if you suddenly get short of money and wish that you had held onto it. It is therefore wise to make sure that you have some extra money put by before you pay it off so that you can cover any expenses that come along. Some people recommend that you have a few months’ salary others recommend a years, it really depends on whether you think there is a risk that you will lose their job and how many bread winners there are in the home. Consider how high your monthly expenditure is and how much money you will need in order to manage and how many months money you feel you will need to put by just in case. You need to think about whether you would rather spend the money on the mortgage and no longer have that debt or use the money now, perhaps on a holiday or other things and wait to pay the mortgage off when it is due.

You may feel pressure to pay back early because it is a debt but it is worth remembering that although it is an expense, you will normally be making money just by having a property. This is because ein the long term property values increase and they tend to increase more than the cost of the interest on a mortgage and it means that you will always be gaining some money, although it will not be as much as if you were not paying out on a mortgage too.
So generally paying off the mortgage early would be seen as a good idea. It will save money in the long run in most cases and lift the burden of debt. However it is important t time it right and make sure that you cannot make more money by investing the money elsewhere and you need to have some funds to fall back on in an emergency.

Lending

Why You Should Never Lend Money to Your Children

It might sound really mean to never lend money to your children. If they come to you and need financial help, you might think that you should help them out. It seems to be the right thing to do, for a parent to help their child, but there can be huge problems if you help them financially and it is always wise to think very hard before you do so.

Firstly it does not help the child to learn to manage on their own. If they know that their parents will always be available to lend them money, then they will not try hard to be so independent. Although it is nice as a parent, to think that you will be there for your children, you will not always be able to be there. If they keep borrowing from you, you may run out of funds and then they will have nowhere else to turn and they may have got themselves into a lot of financial trouble and not be able to get out of it. They may also be taking money from you that you need but because you have let them borrow in the past, you find it impossible to refuse them.

Teaching your children financial lessons is really important. They need to learn how to live within their means so that they do not need to rely on borrowing. If you can help them with this then they should not need to come to you for help. It is something that can be taught form a young age but actually there is no time limit as to when you start so the first time that they come asking for money could be the time to start and explain to them why borrowing is not wise and how they need to learn to manage their money.

Another problem with lending money to your children is that it can cause jealousy between them. If you lend to one child and not to the others they may find out and wish that they also had the opportunity to borrow the money. They may then not have such a good relationship with you after that and even if they do not say anything they may be cross inside. They may wish that they had asked as they didn’t know you would be prepared to lend money or maybe they ask later and you have nothing left to lend them. There can often be sibling jealousy and rivalry even in the most loving families and it is important to think about what impact this might have, both on your relationship with all of your children as well as their relationships with each other.

It could also affect your relationship with the person that you lent the money to. They may not be able to pay you back as soon as you had hoped and that may annoy you. Imagine if you needed the money and they did not have it to give to you, then you could struggle and blame them for that. You may disagree on how much they should be paying you back and when and so that could cause problems as well. You may think that it will be fine and that you can have a rough verbal agreement or not bother and that things will easily sort themselves out. But in reality it may be that they do not pay you back, they seem to be buying things but are not giving any money back to you or they deny agreeing to pay back the money. This is when things can get really nasty between you and it is surprising how easy it can happen.

You may be left thinking that giving money as a gift would be simpler as you could evenly distribute it between children and not worry about having any of it back. However, this still means that they may start to rely on you for money. They may expect more, they may think they can come and ask for money when they need it and just get given it and if you do not have it they may make you feel guilty. It will also not help them to think about how to get money by themselves without relying on others to give it to them.