Savings

Is it Better to Save up Money Rather than Borrow?

Borrowing is something that many people do these days. For larger purchases such as homes, cars and university fees, there may be no choice but to borrow money or else these things would never be bought. However, for smaller purchases, it is sometimes possible to save up rather than get a debt and it is worth considering whether this would be a better option.

Some people find it easy to save up. They may save money each month. The easiest way is to pay money into a savings account each time that you are paid. The money will not be available to spend, so you are more likely to manage your money and not need to dip into those savings. However, it can be more difficult for those that wait and see how much money they have left at the end of the month and save that. It often ends up with no money left to save because if it is in the account it is seen and spent. If you would like to save more money, then it could be worth setting up a direct debit to put money into a savings account every time you get paid and work hard on budgeting so that you manage on the money that you have left.

The reason that saving up can be better than borrowing is the cost. If you save money, you will get paid interest on it and even if it is a small amount you will be able to make some extra money while you save up for the item that you need. However, if you borrow money you will be charged for that borrowing. There are many ways of borrowing but they all have a cost and the charges do vary between different methods. However, they will all cost you money unless you find an interest free deal, which is rare. This means that you need to decide whether it is better for you to borrow money or save up for an item. Calculate the cost of the borrowing and work out whether you still think that the item you are buying is worth it at this extra cost. That decision will be very much up to you and will depend on the value that you hold on that particular item.

The main problem with borrowing does not tend to be the fact that an individual item costs more money. Although that should be a consideration, it is the more long term effects that can be more of a problem. If you borrow a little money, it may feel okay to borrow a little more. Then the debt can start to creep up, you could end up borrowing a lot of money and the cost of that could be very much more significant than just borrowing a small amount of money. It may also feel easier and easier to delay paying back the debt and then the cost will grow and grow as well. You may not think that you are the sort of person that this will happen to, but it can creep up on you and so it is a good idea to think hard about borrowing. Also once you have started borrowing, it may not feel like such a scary thing to do. Therefore it may make other forms of borrowing seem more acceptable. Although some types of borrowing can be very useful, many types are expensive and not worth doing. It can be a skill to work out which is which in your personal circumstances and whether you should be borrowing or not. If you think hard every time you borrow money and find the cheapest way to borrow, after considering whether you really need to borrow, then you will be taking a step in the right direction.

There are some items that you would never be able to afford without borrowing. Buying a home, car or university are fees are examples of borrowing that most people have to do if they want to own a home, car or get a degree. These can be thought of in a different way to other borrowing though. For example, buying a home can be thought of as a sort of investment. Often owning a home is cheaper than paying private rent and once you have paid for the home, you can sell it at any time and get the money back and it should increase in value over the years that you own it. If you do not want to sell it you can always pass it onto your loved ones.

Credit Cards

Is it better to use a Credit or Debit Card?

Many people will use a debit card or a credit card when they are spending money or drawing out cash. They can be very convenient, but there are times when it is better to use one over the other. It can be worth thinking about which will be the best for what you need money for.

If you are drawing cash, then most debit cards allow you to do this at a big selection of cash machines without any charge. However, if you draw cash on a credit card you will always have to pay a charge. This means that it makes a lot of sense to use your debit card most of the time. Of course, if you have no money in your account and so drawing cash will mean that you go overdrawn then you will be charged. So in this situation you will need to compare the price of going overdrawn with the price of a credit card cash withdrawal and see which is cheaper.

When you use a debit card to make purchases the money will come straight out of your current account. If the money is there, this is great, but if it is not, then you could go overdrawn and this could be problematic. Not only will there be interest to pay there may be charges as well. If you have an authorised overdraft then it will be cheaper, but if it is unauthorised, then it could be one of the most expensive ways to borrow money. By using money from your current account, you may also find that this will leave you short of money when direct debts or standing orders come out or when you need money for other things.

With a credit card you do not have to pay for purchases immediately. You will have to six weeks before you get a bill and then you will have the option of paying right away or just paying a small minimum amount immediately (and each month following) and paying the rest off when you wish to. Although this sounds fantastic, it may not be so good if you take into consideration the interest rate. Borrowing on a credit card can be expensive and you need to be aware of the interest rate and how much extra you will be paying if you do not pay off the bill immediately.

A credit card does have other advantages over a debit card. It can give you a certain amount of insurance cover on your purchases. This means that if you buy something that is not as described and the seller will not give you a refund, the card company may be able to reimburse you. It is also more secure for making purchases online. If someone gets hold of your card details and makes purchases with it, the card issuer will reimburse you. If this happens to you with a debit card, it is far harder to get reimbursed and may not be possible. This is why many people choose to use a credit card online rather than a debit card; as they feel that it is more secure.

Sometimes, when you are paying for goods, there will be a charge for using a credit card. This could be with online purchases, bill payments, insurance or buying expensive items like cars. You will have to decide whether you think that it is worth paying the charge or not. This could depend on the amount of the charge and the cost of the item you are buying as well as how risky you think it might be using a debit card.

There are debt risks with using a credit card, which are not so problematic when using a debit card. With a debit card, the money you spend will be taken straight form your account. If you do go overdrawn, the debt will be paid off as soon as money goes back into your account, which will normally be when you get paid. With a credit card you will not have to pay it back immediately. This can lead to some people getting into a lot of debt. If you get multiple credit cards, it can even be difficult to know how much you have spent on each and the debt could build up without you even noticing.

Mortgages

Advantages of a Variable Rate Mortgage

There are many mortgage options out there and whether you are looking for a first time mortgage or changing the one that you have, it can all be rather confusing. One choice you will need to make is between a fixed rate and a variable rate mortgage. Many mortgage companies will have a fixed rate option and it can look really great, but there are some advantages to a variable rate mortgage that are worth considering alongside these.

A variable rate can be changed at any time. Many people assume it changes just when the base rate changes, however, this will depend on the particular lending. They may change their rates in between Bank of England rate changes and it could be up or down. This uncertainty is something which can put some people off, but if you are trapped into a fixed rate and the base rate falls, your rate will not go down. It could mean that you could end up paying more than those on a variable rate.

It is worth noting that mortgage companies will always want to make a profit. Therefore when they are setting their fixed rates, they will make a prediction about what the base rate might be and set it at a level they would think would be an average rate for that term. Then they will be able to make as much profit from their fixed rate as their variable rate. If they get it wrong, you could end up paying more or less but it is probably harder for customers to predict than the lenders. Therefore, if you think that going for a fixed rate will be cheaper, you may be mistaken. However, base rates changes are not always that predictable and the longer the term you are trying to predict; the more difficult it is. This means that it can be rather a gamble, so you may have to make your decision based on more than just that.

If you have a variable rate you may worry that the rates will go up when the base rates go up but they will not fall when the base rate falls, so that the lender makes more profit. Although this has happened, the lenders do want to remain competitive as they know that their customers could switch if they feel that what they are paying is too high or unfair. It is worth keeping an eye on this though as you could switch if you are on a variable rate as you do not get tied in like you will if you are on a fixed rate. This flexibility could certainly be to your advantage if you are happy to regularly switch lenders and think that it will be more profitable if you do so.

Another way to take advantage of rate changes as they drop is to take out a tracker mortgage. This tracks the base rate and so if the base rate drops then your rate will immediately drop. Of course, if it goes up your rate will go up, but most lenders will put their rates up almost as soon as base rate goes up anyway. The only thing to be wary of with these is that the lender will add on percentage. So you may pay 1% plus the base rate, so you need to check and see whether that extra amount is fair and competitive and whether you think it is worth it and will help you to pay less.

So it is important to compare all types of mortgages to consider which will be the best type for you. Consider the pros and cons of each and think about your priorities. Most people put cost as their top priority but there may be other factors such as flexibility, reputation of lender and customer service that may be important to you as well. It can be worth writing a list of criteria and then looking at those factors for each mortgage that you are considering. If you have a financial advisor, then give them the list so that they can find the best mortgage to suit your needs. This could be the best way to get help with making the decision as it can be a really difficult one to make.