WWYD - Paying off debt (0%)?

[Onlyrainbows]

During the months that I was redundant we acquired about 6k of debt. Depending on whether UC was overpaid or not, we should be able to pay all of our credit card debt by the 1st of May (even if UC claims the money back, it would only take a month to pay it). It's all on 0% though so I'm not entirely sure if it makes sense to pay it all off or pay it at a slower pace.

Hi this is a tricky one!

Do you have an emergency fund?

So a small stash of money if something goes wrong like the washing machine breaks?

This might be something you want to save some money (£1,000?).

How long does your 0% deal last? You want to make sure it's defo paid before the deal ends or you'll end up paying loads!

How much are you able to pay off monthly if you didn't pay it all off.

I would leave it at 0% as long as possible before paying off. The value of the debt is being inflated away so long as your income is doing better than 0% increase.

If I had the chance I would clear a lump sum asap because although it's 0% and you can pay monthly I would prefer it just to be gone for good.
Then I could start working on building a nest egg. I say this as someone with 6k on a credit card who would just love for it not to exist!

The smallest amount expired in September, the other two expire in Dec 2023 or thereabouts. No we have no emergency fund at the moment, and the biggest expense on the horizon is s family holiday.

I'd keep £1,000 in an instant access savings account for an emergency. (Key is to not touch it)

I'd pay off the £5000 debt and then split the remaining £1,000 debt between the months between now and Dec 2023. But only if you can afford the repayment!

£1,000 \ 22 months = £45 per month )I think but check my maths!)

So can you afford £45 per month?

We can most certainly afford it. We now have around £2k of actual disposable income pcm, which is why we could pay off within months if we wanted to.

So no savings, you're in debt and your wanting a holiday.

Think you need to look at your priorities

By the time we go on holiday we would be debt free (if I want to go that way) (the holiday would become the new debt so to speak, but would be paid off in about two months). By the 1st of August, we could be debt free, been on a holiday, and with some savings in the bank.

Oh and I forgot about my quarterly bonus!

Given that you can’t know what the future holds, you need an emergency fund BEFORE you pay off 0% debt.

You also need to pay the holiday up front not make it ‘new’ debt before you pay off the 0%.

That way, if the shit hits the fan again in any way, you don’t need to go into debt again.

So, leave the December 2023 0% debts as they are. You’ve got 22 months to pay off that - but double check your ‘or thereabouts’ date!! - so divide the total by 22 and pay that every month.

Work on getting 3-6 months savings in the bank. Pay the holiday and save up for the next one.

@Onlyrainbows

We can most certainly afford it. We now have around £2k of actual disposable income pcm, which is why we could pay off within months if we wanted to.

So if you have £2k disposable income a month why don't you have an emergency fund of 3-6 months expenses?

Really tricky to work out your financial position...

Dolphine because up until very recently I was unemployed (that's how we ended up in debt!)

I agree with the pp who said leave the 0% debt alone for now, pay minimum only.

Plough your £2k a month disposable into savings to build up a decent emergency fund of 6 months income (which will take longer than 6 months obvs if £2k is your disposable) to protect you from the same situation in future.

Use a bit for a holiday but don't go wild.

Once you have a full 6 months net income saved in the bank, then spend 3 months clearing the 0% debt. Dec 2023 is ages away, you should have plenty of time.

I took out a 0% card for some home improvements. I have enough savings to clear it completely, but I am paying off the minimum each month, and adding extra to my savings. When I get to the end of the deal, I will take the extra out of my savings and pay off what's left. That way, I'm putting away enough each to month to clear it, but I'm keeping my access to those funds, in case of emergency. Although I would like it just gone, it seemed more sensible.

I wouldn’t pay it off until it’s actually due but I would open a savings account and make sure you are putting enough in there to clear it. Only do this if you are disciplined obviously but I always have a credit card accumulating debt at 0% and the balance owed in savings and it means I get some interest paid on it (admittedly not much at the moment), have access to a bigger emergency fund that I can spend if needed, and the money to clear the debt waiting.

@Onlyrainbows

Dolphine because up until very recently I was unemployed (that's how we ended up in debt!)

Ah that makes more sense!

Agree with PP that an emergency fund would be good!

That way if you lost your job again you would have a back up and wouldn't have to spend on credit cards again!

Seemingly that seems reasonable but it would take me about 15 months... That would give me a VERY decent cushion, but also seems too far away in the future?

I suppose there may also be a (small! ) negative effect on your credit rating op leaving it 15 months which has only just occurred to me.

If that's a worry for you, maybe get two months full net income emergency fund saved first which should take 5 months. Then spend the next 3 months clearing the debt. Then back to topping up your emergency fund until you get to 6 months?

By Xmas you could be done - debt free, two full months income saved and had your holiday.

6 months is what I aim for in an instant access emergency fund - but obviously depends on your preference too!

I know people who have 12 months income in a paltry interest instant savings account because they feel uncomfortable with less. And also my sister who is extremely well off but leaves herself with only a month instant access savings - the rest of her money is so heavily invested she couldn't get access to it for months and months. Seems barmy to me though!

I've read of the 6 months rule in a few places and it does sound very sensible. IME 3 months wouldn't cover it (I was unemployed for about that length, and it didn't feel that long in the end!), I guess what I would say is that it's very unlikely that we both end up unemployed at the same time, but still possible!

Pay off the debt asap. Save at least £10k in an emergency fund before you even consider booking a holiday. Then pay for your holiday upfront when you do decide to go away.

the holiday would become the new debt so to speak, but would be paid off in about two months

I'm afraid that I would feel uncomfortable taking that kind of risk.

I'd pay off the debt, then build up an emergency fund and only then start a holiday fund. Schedule the holiday when the holiday fund is enough to pay it all off.

If you go the enjoy and then pay it off later route, you are always behind hand and are very exposed to any emergency which crops up.

It's not 6m income it's 6months spending you need in an emergency fund.

So if you're household income is £5K of which £2k is disposable and £3k is essential spending, you'd need 6x£3k in savings. So £18k which at saving £1.5k a month would take you a year to save.