If you’ve been able to build yourself up a savings pot then you’re probably going to be quite protective about it. It’s a satisfying feeling to pore over your statements and see your savings grow – but when should you dip in and use your rainy day fund? Should they be ring-fenced for a special occasion, such as buying a house, paying for a wedding or funding a good retirement or would it be better to use this money to wipe out your debts in the short and medium term?
The answer depends on your circumstances. It depends on how much debt you’re actually in, what type of debt you hold, how much savings you have, what you’re saving for and where you have these savings. It also depends on your wider budget plan.
How much debt are you in?
The average UK household has about £13,000 of consumer debt, including loans, store cards, credit cards and hire purchases. That figure clearly isn’t insignificant, no matter what you’re earning.
It’s always important to have a plan for paying back your debts, and that’s especially relevant when it comes to debts stretching into the multiple thousands of pounds.
Debt can spiral out of control and grow into an even bigger problem so it’s important to tackle it before it becomes a big issue. That doesn’t necessarily mean you’ll have to use your savings but the important thing to note here is that you have to be able to plot a way out of debt and, if you cannot do this any other way because your debts are too large then it’s time to consider using your savings to stave off a serious problem.
What type of debt do you have?
Some debts are harder to control – and grow quicker than others. The Money Advice Service points out examples of some of the more expensive forms of borrowing – such as credit cards, store cards, overdrafts and payday loans.
These are the sorts of debts that could quickly grow – use this calculator to see how much you could end up paying in interest on your credit card for example – and ought to be paid off as soon as possible. In the short term, it might well make sense to divert your savings to pay off this debt to stop it spiralling out of control. You can always ‘repay yourself’ later down the line to plug a gap in your savings.
How much do you have in your savings account?
Clearly, using your savings is only an option if you have enough money set aside to help. You don’t want to leave yourself at risk by using every penny you’ve saved, nor do you really want to use your savings and not make a big enough impact on the debt you owe.
What did you plan to use your savings for?
You might also have your heart set on saving for a particular goal – such as a house, car or wedding – and be reluctant to veer off your plan. While it might make sense to delay your plans to pay off debts in the short term, it’s important to weigh up the impact on your wider savings plan before you raid your account.
Where do you hold your savings?
If you’ve been saving for a bigger goal then you might well have tied up your money in an account that you can’t readily access. If you’ll lose an interest payment or have to pay a fee to break out of a fixed term savings account then you need to factor this into your decision.
What’s in your budget plan?
Finally, it pays to have a proper budget plan in place. If you know how much you spend every month then you’ll know just how much you can afford to set aside to pay off debts. Being fully aware of your budget might mean that you don’t have to make a rash decision and dig into your savings to pay off your debts.