Dump your Debts
These days, being in debt is almost considered normal. The average UK adult has several thousand pounds of non mortgage debt and pays interest rates well in excess of 10% on what they owe. While the miracle of compound returns can be a fantastic thing when you’re saving, it works in reverse when you are borrowing, which explains why debts can often spiral out of control.
Credit cards are a major culprit here. While it is useful for borrowing money, if your card has a high interest rate and you can’t afford to pay it off each month, then it is the credit card company getting the benefit of compound returns or growth and who wants that?
Savings vs Debt: the knockout round.
A very common mistake for well-meaning but misguided savers is to carry debt on their credit card whilst still accumulating savings in the bank or building society. Unless you have a 0% card, these are good intentions, but very bad maths. With savings earning an average of 5%, but debts costing roughly 15%, that’s a shortfall of 10%. It makes far better sense to use the savings to pay off the debt and start again from scratch with savings that are earning real returns.
Beware the lifelong debt!
It’s impossible to emphasise the dangers of debt, even ‘small’ ones can spiral out of control. Take a credit debt of £2000, and you are charged 15% APR, and only ever pay the minimum monthly requirement of 3% of the outstanding balance, then it will take over 174 months to clear.
If you have non-mortgage debts paying them off should be your top priority, only once this is done can you really start to build up your finances for the future.
But what if there’s an emergency?
One more time now: carrying a credit card debt balance in one hand and emergency fund in the other makes no sense and will only lead to further debt. All spare cash should go to paying off your debt: your emergency, if it ever comes to pass, will fit nicely on your credit card.
By Leighton Dawkins
Independent Financial Adviser
Direct line: 020 7665 8597
Hits : 240
