You have worked hard to put some money aside, so it can feel wrong to spend it, even when something important comes up. Borrowing instead can seem like a way to keep your savings safe. But in most cases, using money you already have costs less than paying someone else to lend it to you.
Most, but not all. Here is how to weigh it up, with a simple way to compare the numbers and a few situations where leaving your savings alone may make more sense.
Compare what you would lose with what you would pay
The quickest test is to compare two figures: the interest your savings earn and the interest you would pay on borrowing.
Say your savings account pays 3% a year. Leaving £1,000 in it earns you about £30 over a year. Now imagine borrowing that same £1,000 on a credit card or loan charging 20% a year. Even if you paid it off within twelve months, the interest would come to far more than the £30 your savings would have earned. Savings interest may also be taxable for some people, which makes the gap wider still.
In almost every case, the rate you pay to borrow is higher than the rate you earn on savings. That is why using your own money usually costs less.
When using your savings makes sense
- It is a genuine need. A broken boiler, an essential car repair or a replacement fridge are exactly what a rainy-day fund is for.
- You would otherwise borrow at a high rate. Using savings avoids interest, fees and the risk of falling behind on repayments.
- You would still have something left. If the cost takes a chunk out of your savings but not all of it, you keep some protection.
- You can rebuild. If you have a regular income and a budget with some room in it, you can top the pot back up over the following months.
When it may be better to leave your savings alone
There are times when emptying your savings creates a bigger risk than borrowing:
- It would wipe out your only buffer. If spending the money would leave you with nothing, one more surprise bill could push you into expensive debt anyway.
- Your income is uncertain. If you are between jobs or your hours are unpredictable, cash in hand may be worth more than the interest you would save.
- The money is locked away. Fixed-term accounts may charge a penalty or not allow withdrawals at all. Lifetime ISAs carry a withdrawal charge unless you are buying your first home, are 60 or over, or are terminally ill.
- It is pension money. Pension savings are designed for your retirement, and there are usually restrictions and tax implications on taking money out early.
- The cost is not a need. If it is a want, there is a third option: waiting until you can afford it without touching your savings.
Keeping a buffer, whatever you decide
Some people take a middle path: using part of their savings and keeping the rest back as an emergency fund. Even a few hundred pounds held back can stop a small problem turning into a big one.
To decide how much to keep, work out what your essential bills cost each month. Our guide to the key numbers in your budget shows you how. Many people aim to keep at least one month of essentials untouched, building towards three to six months over time. If the economy feels shaky, our tips on protecting your household finances may help too.
Refill the pot as soon as you can
If you do dip into your savings, make a plan to put the money back. Think of it as repaying a loan to yourself, without the interest.
- Set up a standing order for the day after payday, so the money moves before you can spend it.
- Pay back the same amount you would have paid a lender each month. You already know you can afford it.
- Put windfalls, such as a tax refund or birthday money, straight back into the pot.
- Look for quick wins in your spending. Our ideas for saving money over the summer are a good place to start.
If you are relying on savings or credit just to get through each month, that is a sign to talk to someone. This article is general information, not financial advice. MoneyHelper and StepChange offer free, impartial help with your own situation.
