The balanced debt diet


MoneyPlus Features Team

23rd March 2017 at 11:34am

Alastair Ward explains why he turned his approach to saving on its head. Alastair heads up our customer savings and employee wealth team.

When it comes to managing your money, the usual advice is: pay off your debts and when you’ve done that, start saving. But what about feeling in control – or even just having money for a rainy day?

Well yes you should always pay off your debts, but if you manage things in a binary way, there’s a possibility that you may never build up savings, and here’s why.

It’s all about the debt triangle

Say you build up £25,000 of debt by the time you turn 25. And that’ not a far-fetched figure when you take things such as student loans and living expenses into account.

Focusing all your efforts on paying off your debt and it could easily take you ten years or more to clear it. And, somewhere along the line, there’s a good chance you’ll top up the debt, perhaps for a new car or to sort your credit cards, or maybe having kids.

By the time you reach your mid- to late 30s, you’re just about debt free if you’ve been careful with your money and cut out some high-calorie spending habits.

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Well done! You’ve worked your way through what some money experts call the ‘debt triangle’. You start off with little or no savings, lots of debt and some life insurance; and it flips the other way around in a few years as debts shrink and savings grow.

There’s a catch if the piggy bank is still empty

Except you haven’t managed to start saving anything, or not very much, and you’re hurtling towards 40. It’s more of a savings Bermuda triangle than a debt triangle.

I was going through a period of upheaval a few years ago and, because I’d been so focused on paying off some debt (but topping it up again), I didn’t have much in the way of savings.

Yes, I had built up some pension savings years ago thanks to some great advice from a colleague. But I didn’t have a pot of savings to fall back on when I needed it most.

Money for today, savings for tomorrow

What if, turning some of the accepted wisdoms about saving on their head, I had split my money into different pots instead?

What if I used my money differently, using half to pay off debts, a quarter saved in a bank account (to help stop debt building up again in future), and a quarter into longer term investments I could try to, largely, forget about.

That way, I’d still be reducing my debt but also building up savings at the same time. I’d have money for today, savings for tomorrow and debt reduction at the same time.

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Of course, I realise this approach isn’t going to suit everyone and there is clearly a cost to doing this, assuming interest rates on debts are higher than savings returns.

But it would have given me far more control and comfort that I wasn’t only in debt.  And I’m not sure what the price of that is.

Of course, debt needs to be manageable and some people may need or want a more stringent way to get back into the black; it’s a balance.

Pots of savings

I’ve tried this way of splitting my money over the past few years and I can say that, at last, I’m financially comfortable.

I’ve built up my own savings and a joint savings account, a longer term investment account, and employer share offers. I have Junior ISAs for the kids, perhaps not enough to pay them all the way through university, but certainly enough to give them a helping hand.

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For the longer term, I have my pension as well as some shares which I leave alone and largely forget about for now, but I could sell the shares if I needed to.

Yes, I still have some debt, but I’m in control.

Working part time, I can now spend a day a week with my youngest. Meanwhile, I’m trying to pass some of my new-found financial sense on to my children, starting with my 13-year old.

But that’s another story.

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The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in May 2016.