Whoever said “neither a borrower nor a lender be” was a lucky little sausage. Unless you have a massive trust fund from mummy and daddy, it’s likely you’ll spend a large part of your life as a borrower, even if it’s just a mortgage. Saving will hopefully also feature, whether its to save for something specific, or just to have something put aside for a rainy day.
But how do you navigate the mysterious world of saving and borrowing? Fear not – the Money Guru has words of wisdom and can help you walk the path to financial happiness. Pull up a beanbag and read on, my friend.
Borrowing is one of life’s necessities. A lender gives you a sum of money, and charges you for it over time by adding on a certain percentage to the amount you pay back each month – the ‘interest’. The total amount you pay depends on how much you’ve borrowed, the interest, and how long you’re borrowing it for.
With both saving and borrowing, the most important thing to look at is the interest rate. With saving, you need to go for the highest rate you can find, and with borrowing you need to go for the lowest. There are always other factors to consider and its better to understand everything beforehand.
Saving seems to have gone the way of the bell-bottom recently, and is a bit out of fashion. However, it’s an important part of being wealthy, or at least financially secure. Once you’re out of debt, the best way to save is to have a few ‘pots’ into which you regularly put money for different things in your life.
‘Regularly’ is the key word here. Even if you put just a small amount away each month, the action of putting it in regularly will help your money grow almost without your noticing it. Here are some of the pots you should consider setting up:
The general wisdom is that you should always have a cushion of money saved to cover your living expenses for three to six months. If you currently have debts, you’ll need to get rid of them first.
Once they’re out of the way, work out how much you need to keep going each month, set up a high-interest savings account and keep putting money into it until you hit that magical three to six months safety net.
This is your ‘rainy day’ savings pot. Like MC Hammer advised – you can’t touch this. You should only delve in if you lose your job, or fall ill, and it might be best to put it into a postal account or 90-day notice account to avoid temptation.
Big purchase savings
Set up another savings account for Christmas, your holiday, a new elephant, or whatever else is looming on the horizon. Some bank accounts now offer you a multiple ‘savings pot’ facility, which can be useful for this type of thing, but there’s nothing to stop you setting up accounts with a few different financial companies. The amount you put in depends entirely on how much you can afford, and how much you need to save.
A much wiser and cheaper way to deal with possible repair bills is to set up a small savings account specifically for this purpose. Put a small amount of money in each month and if you need to get something mended, you can just dip into it. If you don’t, you’ll have a nice pot of money left over to buy yourself something ace like beard oil or a 5kg bar of milk chocolate.
A few points on saving:
- Always shop around for the best (highest) interest rates. Look on the internet or in the ‘Best Buy’ tables in the Sunday newspapers
- Keep an eye on your savings accounts. Financial companies often drop their rates without warning so if this happens to you, vote with your sandals and move to a better account.
- Remember to take tax into account when calculating how much you’ll make on your savings.
- If you want to avoid paying tax on the interest you make, keep your money in a cash ISA (Individual Savings Account). Check out https://www.gov.uk/individual-savings-accounts/overview for the current annual limit on how much you can save.
- If you want to save, but like to have a flutter too, consider Premium Bonds. Its worth having a search around to see whats on offer.
There are loads of ways you can borrow money – if your credit is good, that is – but before you borrow, ask yourself:
- Do I really need that thing I want to borrow money for?
- Is there a cheaper way I can get it?
- Could I wait a little while to give myself the chance to save for it?
- What would be the total amount I’d spend if I borrowed the money for it – would it be worth that amount?
That last point is very important. Unless you’re borrowing money for free (on a 0% credit card, for example) the item you’re buying will actually cost you more in the end than the ticket price. Say you buy a car for £6,000. You put down £1,000 deposit and get a loan of £5,000 over three years at 13.9% APR. The total amount repayable will be £6,072.48 so your interest bill is £1,072.48 so in fact, the car will cost you £7,072.48. If you still think those wheels are worth the wedge, then go for it.
If you want to borrow, keep these points in mind:
- Shop around (at moneyguru.com of course).
- Go for the cheapest rate you can find.
- Look for the most flexible loan (so you can pay it off in full early if you’re able to).
- Don’t borrow money against your home if you can possibly avoid it.
- Don’t borrow any more money than you absolutely have to. The more you borrow, the more interest you’ll pay.
To borrow money, you’ll need a good credit score. If you want to check out your score and improve that financial karma, visit my website at www.moneyguru.com/credit-reports. If you’re all good on that front, here are a number of ways to borrow:
Would you believe, one of the cheapest ways to borrow now is on credit cards? With some skilful money manoeuvring, you can work wonders. Some offer 0% for an initial few months on purchases. If you can take one out, buy the item you want and when the 0% deal is coming to an end, transfer the remaining balance to a ‘0% on balance transfers’ card. Keep doing that until you’ve paid it off.
Otherwise, credit cards can be one of the more expensive ways of borrowing money, particularly if you don’t pay the amount owned in full each month. Not only will you have to pay interest but they’re very quick to slap on the charges if you’re late.
If you do pay off your debt each month, cards can be a very handy way of paying for things. You usually get free insurance on the things you buy, you get at least a month’s grace before you have to pay it off, and some cards even give you cashback when you use them. What’s not to love?
To compare the most righteous credit card deals, step into my office at www.moneyguru.com/credit-cards
There’s huge competition in the personal loan market now. People used to go to their bank and get grilled by some bloke in a suit about what they’re spending it on. Now, you can go online, find a loan as cheap as a mortgage, and you don’t have to justify it to anyone. What a wonderful world we live in. However, there are a few important points to remember:
- Comparing APRs (Annual Percentage Rates) can be useful to find the cheapest loan, but a more accurate way is to compare the TAR (Total Amount Repayable). If this isn’t written down in the loan offer, ask them for the figure – they have to give it to you.
- Don’t go for a loan that is set against your home, as it could jeopardise the roof over your head.
- Don’t get conned into buying an add-on like PPI (Payment Protection Insurance). They’re not worth it and useless for most borrowers.
- Beware of representative APRs. Although 51% of borrowers are predicted to be offered the advertised representative rate, you might not qualify for this if you don’t fit their ideal customer profile.
You can transcend space, time and unsuitable loans by a quick visit to my website. Knock yourself out, tiger: www.moneyguru.com/loans
Store cards, the only point in having them is to get the 10% discount on your first purchase and, perhaps, the odd sale preview. They’re not great for borrowing, and are generally one of the most expensive mainstream ways to borrow money.. If you’re ever tempted to buy things with them, always make sure you pay your bill right on time.
Although a remortgage certainly looks like one of the cheapest ways to raise some cash, there are a few big disadvantages to it:
- It puts your home at risk in a way that all ‘unsecured’ loans can’t do.
- It doesn’t address the main issue – you’re probably overspending.
- Ideally, mortgages should be paid off as quickly as possible, not given even more time to accumulate interest.
Of course, when you’re out of your current mortgage deal, remortgaging to get a better deal is a wise thing to do – particularly if you’re not increasing the original amount you borrowed at all. To remortgage for anything other than improving your home – and increasing its value – isn’t a good idea at all. Whatever you want the money for – a holiday, a sofa or an electric sitar – save up for it instead.
- The only reason you should re-mortgage is to switch to a cheaper deal.
- A mortgage should be paid off as fast as you comfortably can. It isn’t a cash machine, my friend.
- Don’t just take out a loan for another 25 years. Make sure it’s the same length as the time left on your original loan – or less.
- Arrangement fees are going up all the time. If you’re going to remortgage, make sure it’s worth it.
I can help you on the path to mortgage happiness right here: www.moneyguru.com/mortgages
Alternative methods for borrowing and saving
Bank of mum and dad
If you’ve got generous parents, it might be time to pop round with a bunch of flowers and a cheesy smile, as this is often the cheapest and least-hassle way of borrowing money. Increasingly, young people are borrowing large amounts from their parents to get on the housing ladder. The pros of borrowing from Ma and Pa are that it’s cheap, flexible and quick. The cons are that it makes you even more beholden to your long-suffering parents, and could make them poor in their old age if you don’t pay it back.
Credit Unions (CUs)
Credit Unions have never really taken off in this country, but they’re big in America, Ireland and other countries. They’re somewhere between a bank and a co-operative. Owned and controlled by their members, they’re run for the benefit of their members – all of who share a common bond like they live or work in the same area, or in the same business. Basically, everyone pools their savings together and these savings provide the funds for loans. Great stuff.
Interest on loans is also charged at competitive rates and there are no early redemption penalties, nor do you have to watch out for hidden extras such as overpriced payment protection insurance. Usually you have to build up a history of saving with a CU before you can borrow, but this can be as little as three months.
And there we have it. The world of online loans can seem like a minefield sometimes, but if you need more straightforward and simple guidance, visit my Wisdom section over at www.moneyguru.com. Seek and you shall find, my friend.
Peace and loans,