Is there any point in having savings?
Discussion
I have 6 months comfortable living expenses saved in a separate bank account, the idea being is if I get sacked from work then I will be able to pay all my bills, eat and still have a little change for entertainment for up to 6 months.
I pretend this money doesn't exist, e.g. I don't include it in any financial considerations such as buying a new car or whatever.
However I do have debt in the form of a mortgage, and I've read in numerous places that you shouldn't bother with savings if you are paying interest on a loan, and if the worst happens then just use your credit card as you'd had to pay interest anyway.
Which train of thinking is right? I am paying more interest on the mortgage than I receive in savings, but it's not a huge amount.
Its peace of mind knowing the money is there, but as we all know we shouldn't make financial decisions based on emotions...
I pretend this money doesn't exist, e.g. I don't include it in any financial considerations such as buying a new car or whatever.
However I do have debt in the form of a mortgage, and I've read in numerous places that you shouldn't bother with savings if you are paying interest on a loan, and if the worst happens then just use your credit card as you'd had to pay interest anyway.
Which train of thinking is right? I am paying more interest on the mortgage than I receive in savings, but it's not a huge amount.
Its peace of mind knowing the money is there, but as we all know we shouldn't make financial decisions based on emotions...
There's no right way of thinking, it's all about what you're comfortable with.
From a purely financial standpoint, you'd be better off overpaying your mortgage because you earn naff all on your savings. But if that peace of mind - which isn't quantifiable in financial terms - is worth more to you than the interest you save, then that's what's right for you.
However as a newbie to mortgages I was stunned to see the difference overpaying makes.
Assuming £250k mortgage at 4% with 25 years to run, an overpayment of £250 per month would see you pay off your mortgage 6 years earlier and save £40k in interest.
Check out this basic overpayment calculator to see the difference that the overpayments that you can afford would make.
http://personal.natwest.com/personal/mortgages/mor...
From a purely financial standpoint, you'd be better off overpaying your mortgage because you earn naff all on your savings. But if that peace of mind - which isn't quantifiable in financial terms - is worth more to you than the interest you save, then that's what's right for you.
However as a newbie to mortgages I was stunned to see the difference overpaying makes.
Assuming £250k mortgage at 4% with 25 years to run, an overpayment of £250 per month would see you pay off your mortgage 6 years earlier and save £40k in interest.
Check out this basic overpayment calculator to see the difference that the overpayments that you can afford would make.
http://personal.natwest.com/personal/mortgages/mor...
SkinnyPete said:
However I do have debt in the form of a mortgage, and I've read in numerous places that you shouldn't bother with savings if you are paying interest on a loan, and if the worst happens then just use your credit card as you'd had to pay interest anyway.
In simple numbers terms, it generally costs more to borrow money than you gain from interest/growth in saving it. OK so you might have a 1% mortgage and make 10% on shares in a good run BUT the general principle stil applies. Just like insurance companies make money by paying out less than they take in... well you get the idea.Savings are a good idea of course, but if you only had £1,000 it would be unwise to use it all to pay off debts and have nothing left for emergencies. By contrast, if you had £1M in a current account it would be smart to pay off a £100K mortgage. Work out how much interest you'll pay on your mortgage over its term - it will surprise you - and then you can see how much you will save by paying some of it off, and then you can make a rational decision.
NB: Don't start putting things on credit cards if you can't pay it off in full each month.
Simpo Two said:
In simple numbers terms, it generally costs more to borrow money than you gain from interest/growth in saving it. OK so you might have a 1% mortgage and make 10% on shares in a good run BUT the general principle stil applies. Just like insurance companies make money by paying out less than they take in... well you get the idea.
Savings are a good idea of course, but if you only had £1,000 it would be unwise to use it all to pay off debts and have nothing left for emergencies. By contrast, if you had £1M in a current account it would be smart to pay off a £100K mortgage. Work out how much interest you'll pay on your mortgage over its term - it will surprise you - and then you can see how much you will save by paying some of it off, and then you can make a rational decision.
NB: Don't start putting things on credit cards if you can't pay it off in full each month.
+1Savings are a good idea of course, but if you only had £1,000 it would be unwise to use it all to pay off debts and have nothing left for emergencies. By contrast, if you had £1M in a current account it would be smart to pay off a £100K mortgage. Work out how much interest you'll pay on your mortgage over its term - it will surprise you - and then you can see how much you will save by paying some of it off, and then you can make a rational decision.
NB: Don't start putting things on credit cards if you can't pay it off in full each month.
I have an instant access ISA that holds @3+ months emergency funds due to the nature of my work.
This stays as is and is not taken into consideration with regards budgeting or forecasting.
I'd rather have this readily available (if required at short notice = piece of mind) than other options available if not, i.e., mortgage holiday, credit cards, etc.
Therefore, thereafter any monthly "disposable" income would go towards paying off the mortgage early.
However, it is worth bearing in mind that there will be limitations/restrictions to how much you can overpay on your mortgage, but this is, as stated, well worth doing.
also what about benefits? Eg if you have large savings and get made redundant, presumably there is no social help. But if you have no savings and get made redundant, are there any social benefits that would be given to assist you? (I don't know the answer, just a thought). In which case there is a disincentive to having savings.
CoolHands said:
also what about benefits? Eg if you have large savings and get made redundant, presumably there is no social help. But if you have no savings and get made redundant, are there any social benefits that would be given to assist you? (I don't know the answer, just a thought). In which case there is a disincentive to having savings.
In other words, 'I'm not going to have any savings because then if I get the chop I'll be able to claim benefits'. So if you don't get the chop you will have to spend all your income. And then you'll get to 68 and be penniless and end up in a Council Care Home.Money may prevent you getting State Bennyfits but it buys choices and a whole better quality of life. It's not good to envy the impoverished - oddly enough, they envy the rich!
(I wonder if you could put your savings in a Trust, such that it was not taken into account for bennyfits?) Cake...eat...?
well it may make more sense to put the money into paying off the mortgage so you have no savings. Doesn't mean you'll be poor when you're older as you will have paid off your house. Just something to think about. And yes if trusts are better use them too, why not, or should only the ruling classes benefit from everything us paupers dont understand?
Yes indeed, if you need to go into a care home you can sell the house, sorted.
I don't understand Trusts either, I'm just aware of their existence. I don't know if they can be used in that way but I do know they can get complicated and have to be set up right, so you need to consult an IFA or solicitor.
It's also not a matter for 'ruling classes', only for those with enough brains to think of it (and if people with brains happen to be in charge, maybe that's better than the opposite?)
I don't understand Trusts either, I'm just aware of their existence. I don't know if they can be used in that way but I do know they can get complicated and have to be set up right, so you need to consult an IFA or solicitor.
It's also not a matter for 'ruling classes', only for those with enough brains to think of it (and if people with brains happen to be in charge, maybe that's better than the opposite?)
I think it depends on how many years you have left on your mortgage, how quickly you would find another job if you find yourself unemployed or unable to work.
From my own perspective, i would rather have the money in the bank to tide me over.
Having looked into overpaying my mortgage, I would need to commit £500+ more a month to knock 5 years off my remaining 17 year term. That amount would go a long way to making the 17 years more comfortable and would enable us to live so much more.
A lot also depends on the terms of your mortgage product. If you're lucky enough to be able to take advantage of your over payments in the form of taking a payment holiday, you can buy yourself a bit of time should you find yourself between jobs. If you don't have this benefit then you'll always be wondering how many missed payments your mortgage company will tolerate. I'd rather have the savings to dip into to avoid this and sleep a bit better at night knowing that my family will be insulated from the effects for a while.
From my own perspective, i would rather have the money in the bank to tide me over.
Having looked into overpaying my mortgage, I would need to commit £500+ more a month to knock 5 years off my remaining 17 year term. That amount would go a long way to making the 17 years more comfortable and would enable us to live so much more.
A lot also depends on the terms of your mortgage product. If you're lucky enough to be able to take advantage of your over payments in the form of taking a payment holiday, you can buy yourself a bit of time should you find yourself between jobs. If you don't have this benefit then you'll always be wondering how many missed payments your mortgage company will tolerate. I'd rather have the savings to dip into to avoid this and sleep a bit better at night knowing that my family will be insulated from the effects for a while.
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