View the article online at http://citywire.co.uk/money/article/a1007145
Beat debt and take control of your finances
Just because you’re in debt doesn’t mean you can’t be in control of your money. Here are some tips to minimise debt and start saving.
If you’re up to your eyeballs in student loans and feeling skint, then someone telling you to save can be pretty irritating.
Chances are you’ll clench your teeth and think: ‘Where am I going to get the money from to save?’.
For lots of people just starting out in their professional life, saving seems like a distant dream, especially if you’re loaded up with student debt before you’ve even earned a single pay packet. I’ve only just paid off my student debt this year at the grand old age of 34, and I ‘only’ had £15,000 of debt. This is peanuts compared to the sums that some will enter the world of work with today.
After your monthly student loan payment is taken, and maybe even a pension contribution, your pay packet probably feels a bit light. Factor in rent, bills, transport and a bit of money to have a life - and your wages may not stretch to putting a few pounds aside into an ISA.
This doesn’t mean that you need to give up on your finances. It may not feel like it, but you are still making progress because paying down debt is a form of saving. Every time you pay down the money you owe, whether it’s student debt or an overdraft or a credit card, you’re saving yourself interest.
Let’s take credit card debt as an example. When you pay a bit off every month, the payment you make partly goes towards the interest and partly towards the capital (the sum that you’ve spent). The more you pay down the capital, the less you pay in interest so every debt payment you make saves yourself money. Of course, this assumes you stop spending on your credit card!
If you can pay more than the minimum payment towards your debt, that is even better because minimum payments keep you in debt, paying interest for the long term.
The average APR (annual percentage rate) - essentially the cost of borrowing over the year - was 21.6% last year, according to Moneyfacts.co.uk. That’s huge and means for every £1,000 spent on a credit card, you’d pay £216 in interest per year.
Let’s say you put £1,000 on your credit card for an amazing holiday. Under the T&Cs of the credit card contract, you have to repay a minimum of 1% of money owed plus interest or £5, whichever is highest.
The holiday would cost you £27 a month for the first repayment and would decrease after that as the balance reduces.
Without putting anything else on the card, paying the minimum amount each month would mean the holiday takes 18 years and 11 months to pay off. You are not just paying off the £1,000 original balance, but also a staggering £1,441 in interest. That £1,000 holiday just cost you £2,441 and nearly 20 years to pay back.
However, by keeping the monthly repayments at £27 rather than allowing them to reduce to the minimum, the holiday takes four years and 10 months to pay back and the interest costs would total £553 - adding 50% to the cost of the holiday.
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