Managing debt
For many people, debt is a necessary part of everyday; few people are able to buy a home without a mortgage, for example.

If properly managed, debt can be a useful tool – but it is essential to remain in control.

You are unlikely to receive more interest on your savings than you will pay on your borrowings. It is generally prudent therefore to concentrate on paying down your debts before you focus on savings. Nevertheless, you should still aim to have a cash buffer you can access in an emergency – as a rule of thumb, enough to last you for three months.

Don’t ignore debt – it will not disappear. If you have debts on top of your mortgage, the most sensible strategy is to try to pay off any outstanding loans, using your savings if necessary. You should always clear your most expensive loans first, although you should check in case there are charges for early repayment. According to the Money Advice Service, the most expensive debts are incurred through credit or store cards, unauthorised overdrafts, catalogue shopping, pay-day loans and door-to-door loans.

Nevertheless, bills such as mortgage or rental payments, electricity or gas bills, council tax, income tax or VAT remain top priority. Failure to keep up with these payments could result in loss of energy supply, perhaps the loss of your home and maybe even a prison sentence. Although credit-card debt is expensive, failure to pay will not end in prison, although you might face court action and the seizure of your possessions.

According to research by Nationwide Building Society, more than half of UK credit cardholders would never consider doing a balance transfer on their credit cards. However, by not moving their balance, people are not taking advantage of a useful way to manage their debt and could be missing out on making savings.

Debt consolidation services allow you to combine all your loans into one. However, they are a relatively high-risk strategy – their long-term cost can be very high, and they are usually secured against your house, putting your home at risk if you do not manage to keep up with the loan repayments.

If you are having problems, take expert advice from your financial adviser or a free debt advice agency, or talk to the Citizens Advice Bureau. Above all, make sure you are in control of your debt. Don’t allow your debt to control you.

Hoskin Financial Planning