Jan
Why do we save? Depending on who you ask, it could be to go on holiday, redecorate the house, or splash out on special purchases like a new car, big TV, etc. Very few people who build up a savings account do so with the intention of using it to pay off debts, or spending it on the ‘boring but essential’ things in life, such as food, tax, bills…
In today’s economic climate, however, we might not have a choice. With living expenses rocketing and personal debt at record heights, people aren’t just cutting back on saving – they’re being forced to draw on money they’d already saved, as Chelsea Building Society discovered this summer.
14% of the 1,050 UK residents questioned admitted to drawing on their savings in the past three months to pay for food. A further 15% had done so to pay for their utility bills or council tax, while 12% had used savings to pay for mortgage or rent.
There are various reasons why a rising cost of living is dangerous. First of all, drawing on our savings is an indication that our expenditure is exceeding our income – and a warning that we’re not far away from real financial trouble. Unless the cost of living starts dropping, we’ll start falling into debt as soon as those savings are gone.
Second, there’s existing debt. In 2008, according to independent financial adviser website Unbiased.co.uk, the average Briton will spend 70 days working to pay just the interest on their credit card and loan debt – without reducing the debts themselves. When that money needs to be spent on something other than debt repayments, borrowers could face legal problems as well as growing debts.
Third, we’re forced to draw on existing savings, which we once viewed as a safety net against potential hardship – or hoped to spend on something fun and / or extravagant. Most debt advisers warn us to set aside at least three months’ income for a rainy day, to keep ourselves out of debt if our income drops or disappears.
Finally, when every penny we’re earning goes towards bills and debts, there’s simply no way to save up today for tomorrow’s expenses, whether that means college or homeownership, marriage or retirement.
Looking ahead, the Building Society found little optimism among its respondents. Over the next three months, 79% expect their food bills to go up, and those who are still managing to save expect to save less – on average, 13% less per month.
“Today’s prices are clearly pushing many people into financial difficulty,” said a spokesperson for financial solutions company thinkmoney.com. “They’re forcing some into debt and forcing others deeper into debt – the people who had been on top of their debt repayments but simply can’t keep up now that their other costs have escalated.”
“We would advise anyone who’s worried about their finances to get in touch with an expert debt adviser as soon as possible. There are plenty of debt solutions – from debt management and debt consolidation to IVAs (Individual Voluntary Arrangements) – that can bring down their debt repayments and free up the cash they need for their everyday expenses. In general, the sooner they do this, the more options they’ll have and the easier it’ll be to get out of debt.”