What is good debt v bad debt?
Good debt is defined as money borrowed for things that can help build wealth or increase income over time, such as student loans, mortgages, or a business loan. Bad debt refers to things like credit cards or other consumer debt that does little to improve your financial outcome.
There’s very little chance you will be able to live your life without borrowing money at some point – whether it’s for university, a house, or something else that you need. Logic has changed over the years, while our grandparents may say “Neither a borrower nor a lender be” this is no longer feasible (It’s actually a quote from Shakespeare – I’m sure your grandparents aren’t that old!). We now live in a different world and need to be equipped with the tools that work.
Get debt wrong and it will cost you a fortune. You can’t cancel your debts, so you need to get it right, first time. More people lead miserable lives because of debt than any other single factor.
Credit cards do NOT give you free money! You have to pay back every penny you spend…and a whole lot more. Interest charges on credit cards can be extreme!
Credit cards cost you nothing as long as you pay off all the balance each month IN FULL! (set up a direct debit to do this and you never pay any interest!). A credit card can be a useful tool - used carefully it can help you manage your finances and build your credit score.
Be a Savvy Shopper!
Avoid bad debt by spending intentionally but also by being a savvy shopper!
Always refer to the Martin Lewis website moneysavingexpert.com before buying anything and use comparison websites that can quickly search to find you the cheapest price or the best quality product.
Martin Lewis Money Mantra: Do I need it? Is it worth it? Have I checked if it’s cheaper elsewhere? If not…Don’t buy it.
Loyalty to a product or service provider is very rarely rewarded. What you will usually get if you are loyal to a company is a bad deal. Companies are not your friends. By staying with the same company – whether it’s a bank, an insurance firm, or even your mobile phone provider - you will pay more! This is particularly true of Home insurance and Car insurance companies: always get quotes from comparison sites between 20-24 days before the renewal date as this can save £100’s! Only pay monthly if the interest rate is negligible.
Have an Emergency Fund
Before you start saving and investing, pay off any bad debt first and then create an Emergency Fund of at least 3-6 months’ living expenses; you never know what’s around the corner (Covid!). This fund will stop you from going into debt if something unplanned happens.
Keep this in a savings account or premium bonds for quick and easy access. You might also want to put some money aside each month for big lifestyle spends, like a special holiday or a car, etc.
Get the best mortgage LTV
At some stage, you may want to buy a house and will have to take out a mortgage. When you look at taking out a mortgage you will find lenders referring to ‘loan to value’ (LTV). This is the size of the loan relative to the property’s total value and is often expressed as a percentage.
For example, if you are buying a house for £200,000 and borrowing £180,000 on a mortgage, this would be an LTV of 90%.
If you can reduce the LTV by saving more money, the mortgage provider will charge a lower interest rate and you will pay less for your property overall.
For a £200,000 property with an LTV of 90%, the interest rate charged on the mortgage could be 1.79% with a monthly repayment of £744.
By reducing the LTV to 80%, the interest rate could go down to 1.41% reducing monthly repayments to £633; a monthly saving of £111.
To get the best mortgage deal, do your own research, and then visit a mortgage broker. They should have access to the whole of the market and be able to get the best deal for you.
Should I pay off my mortgage early?
Once you have your mortgage, should you overpay to pay it off early? This is an often asked question and the answer depends on you. Psychologically you may feel it is beneficial to pay off your mortgage for the security this gives, but financially you may make more money from investing rather than overpaying the mortgage.
For example, if your mortgage interest rate is 2% and you can potentially earn 4% by saving/investing then the smart thing to do is to keep the money working for you. Paying off the mortgage early is a guaranteed return whereas investing has some risk involved.