Personal debt

To put these figures into context, the average household now owes £56,588, including on mortgages – that is £29,684 for every adult in the country.

This is not necessarily a bad thing for the economy or even individuals. After all, the debt is incurred in spending on items that generate employment for others, whether we are buying goods or services. And even where spending is on imports, there is a global benefit in that third world countries are expanding their economies to the extent that they will need to purchase the goods and services that we export to them.

Conversely, we should not assume that such “macro-economic” benefits are an excuse for a spendthrift culture. Increasing personal indebtedness can have potential adverse consequences for individuals and families; managing our own personal finances should therefore be a priority for everyone.

Managing debt

Borrowing can help us buy the things that we need, but nothing in life is free and interest can mount up, especially if repayments are not made on time. Ensuring that essential items are purchased only from savings is not always possible, but where borrowing is required, it makes sense to look for the lowest cost option – which is not always the easiest.

For example, making a purchase in a department store using their own card can look easy and attractive, especially if they are offering a discount for taking the card out in the first place. But the interest rate can be very high. Accepting the offer and then paying off the card immediately (and never using it again) can make considerable sense; you receive the discount but do not pay an exceptionally high interest rate.

Alternatives

Consolidating borrowings into secured loans, either with a bank or as part of your mortgage can represent a major saving in interest rate, even with February’s cut in base rate, which should reduce the cost of borrowing overall. However, since the loan is likely to be extended over a longer period, it is important to consider whether you are trading off an immediate saving for greater overall cost, as the lower rate is payable for many more years than the original borrowing. It is a matter of balance; clearly current expenditure needs to be managed, but not at the expense of long term financial security.

As so often, financial matters should be seen “as a whole” rather than in isolation. Saving and borrowings are really two sides of the same coin; what matters is to understand how each is affected by the other and how to manage their relationship. Borrow too much early on and the value of long term savings may be reduced.

Insurance against risk

It is also important to ensure that you have adequate insurance to repay your borrowings – or at the very least the interest – in the event of your death, illness, or unemployment. However, buying cover from a credit card provider or bank is not always appropriate, because there are frequently exclusions that make the cover useless under certain circumstances for some people.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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