Building up a nest egg is always a good idea, whether you're saving for something in particular or just for a rainy day. But when is the right time to dip into the funds you've built up?
Opening a savings account that pays a competitive rate of interest and adding to it on a regular basis is a great way to build up a decent savings safety net.
However, while leaving your savings untouched in a high-interest account is usually the best way to see your money grow, sometimes dipping into those saved funds is actually the best course of action to take. We look at when using your savings is a good idea.
When there’s an emergency
If you encounter an emergency that will affect your finances in some way it's a good idea to dip into your savings. Perhaps you need to tide over your income if you’ve been made unemployed, pay to have your car fixed if it breaks down, or receive an unexpected bill – this is a good time to fall back on your savings to help you meet unforeseen costs.
In an emergency the alternative to using savings is to borrow money, but this may run you into financial difficulty if you rack up expensive debt on credit cards, go over your overdraft limit, or end up defaulting on repayments. As such using your savings, if you have them, is usually the best way to go in this situation.
When it’s a special occasion
Some occasions, whether planned or unexpected, call for a little extra cash to meet the cost of the celebrations. Christmas, birthdays, weddings, and anniversaries, for example, might require you to outlay more than you usually would in a regular month and so your savings are a good place to turn.
It’s a good idea however to try to replace any money you’ve taken from your savings soon after the special occasion is over, so your savings can remain topped up and healthy.
When paying for insurance in one go
It is often much more cost-effective to pay for your home, car, or other insurance in one go at renewal, instead of spreading your payments over the year. While paying monthly does help to break up an expense that can be hard to pay all at once, doing so usually ends up costing you more in the long-run.
This is because a payment spread over the year is seen as a loan by many insurance providers which you ‘repay’ monthly. As such your insurance provider is likely to charge you ‘interest’ on the overall amount meaning each monthly payment adds up to more than if you’d paid up-front.
Your savings can really come in helpful here by allowing you to meet the entire cost of your year’s insurance in one go and avoid the extra costs that spreading your payments incurs.
When you have expensive debts
If you have debts that are accruing interest it’s worth considering using your savings to pay them off. This particularly applies if you have expensive debts on credit cards, store cards, and the like.
Depleting your savings to get rid of your debt may seem counter to the mantra that you should always keep enough savings to pay for 3 months’ living expenses. However it can be much more cost-effective to cancel out your debts with your savings rather than keep debts and savings running parallel to each other.
This is because your debts are likely to be accruing interest at a faster rate than your savings are earning it. If you use your savings to pay off these expensive debts you’ll have no more interest to pay and can put more money into your savings as a result. This does of course depend on your individual circumstances as well as the size and cost of your debts, but it is an option worth considering.
When borrowing is your only other alternative
In any situation when you are considering borrowing money in order to pay for something, it will usually make more financial sense to use savings you have already built up than to fall into debt.
Although you may feel unsure about spending your savings, you’ll need to weigh this up against the potential consequences of building up debt by taking out a credit card or loan which will have the added cost of interest accrued. Also, depending on what you need to pay for, you may not have to deplete your savings completely.
For example if you receive a large bill which you will find difficult to pay off in one go with your usual income, consider giving yourself a helping hand by dipping into your savings. Or perhaps you have to quickly come up with some money for a deposit on a house – in cases such as these, it’s better to use money you already have than to borrow money you don’t have.
The only exception to this rule is if you can find a way to borrow interest-free with a 0% credit card or interest-free overdraft, and pay your borrowings back by the time your 0% deal expires.
What else do I need to consider?
If you do decide to use some of your savings to help you pay for a special occasion or to help you out of debt, it’s a good idea to try and replace this as soon as you can. Make a note of the amount you have withdrawn from your savings account and when you are more in control of your incomings and outgoings, resolve to top your savings back up to their original balance.
Also remember that depending on the type of savings account you have, there may be restrictions on how and when you can withdraw money. As such you shouldn’t start plumbing the depths of your savings account until you’re familiar with its terms and conditions with regards to withdrawals.
For example if you have a fixed bond savings account you will only be able to withdraw money at the end of the term, while if your account is instant access you should be able to deposit and withdraw as you please. Look into the small print of your account so that you know where you stand and don’t suffer unexpected interest rate penalties by dipping into your savings.
