Do you have debt and savings? (Picture: Getty/Metro.co.uk)
If you’re one of the 62% of UK adults that has some form of debt, Martin Lewis has some advice for you.
In the latest edition of his newsletter, the Money Saving Expert founder shared tips on how to boost your savings, with a special caveat for those who owe money on products like credit cards or personal loans.
According to Martin, paying debt off ‘is often more lucrative than saving,’ while ‘those with loans or credit cards and savings are seriously overspending.’
Noting that this goes against common guidance to put away cash for a rainy day, he explained the reasoning behind the theory.
If you have £1,000 debt on a credit card at 23% APR, this costs £230 interest over the course of the year. Conversely, £1,000 in a savings account at 5% earns £50 in interest over a year, meaning it costs £180 a year less to pay the debt off using the savings.
‘It’s that simple,’ Martin added. ‘Debts usually cost more than savings earn. Cancel them out and you’re better off.’
It’s all about what costs less in the long-run (Picture: Getty Images)
The financial guru says he finds it ‘deeply frustrating’ that many people have both borrowings and savings at the same time, since banks turn a profit by lending out the money their customers save at a higher rate.
‘Therefore, on the whole, it’ll always cost more to borrow than you can earn by saving,’ he continued.
However, Martin also shared two exceptions to this rule, where debts are cheaper than savings, or cost so much to pay off that there’s no point.
Do you think paying off debt is often more lucrative than saving?Comment Now
The first of these is ‘the penalty exception‘, which is when you’re locked into the debt, and will be charged a penalty for paying it off early. This is often the case with mortgages, as well as some loans.
The second is ‘the interest-free/very cheap debt exception‘, when the interest rate on your debt is less than the amount your savings earn after tax. You’re most likely to encounter this when it comes to 0% introductory credit card offers, 0% overdrafts, and student loans.
In this case, the MSE founder says that ‘providing you’re financially disciplined, you can profit from building up savings and keep the debts,’ in effect ‘being paid on money lent to you by the banks for nothing.’
Source:: Metro
