Saving with Debt

Published Jan 23, 2019

It's that resolution time of year again. The time when muffled conversations in office hallways delight in new vogue diets, burgeoning fitness regimes and plans for a better work/life balance.

Sadly experts say that by February the resolutions are mostly forgotten. Life takes over and the holiday influence loses its glow. So, how do we maintain the momentum and make our resolutions stick? Forsyths Principal and Financial Adviser Craig Benham shines the light on savings plans for the new year and how to keep the enthusiasm going.

The average household debt in Australia stands at 190% of household income. That means for the average Australian household income of $85,000, there is approximately $165,000 in debt. It's a pretty daunting thought.

So what can we do if we still need to pay off debt but want to save for something special?

Is there room for debt and saving?

Craig Benham says there is, but there are ways our savings can work to reduce the interest we pay on our debts as well.

Whether we save in a standard savings account, a fixed term account or under the mattress the reality is we'll be earning less in interest than we're paying on the interest of our debt.

Put simply it means we're better off placing savings into our debt and taking it out when we need it.

It might not be as exciting to watch it grow (or watch the debt reduce) but in the long term it could mean slicing years off the length of the loan.

So how can it be done?

Many loans have the option of an offset account or a re-draw facility.

The offset account is where your income and any additional money can be placed in an account which is linked to your home loan account. The account balance is then "offset" daily against your home loan balance. It means that your income (while it's in that account) is reducing the amount on the debt and therefore reducing amount of interest charged.

It's worth noting that the interest rates on offset accounts can be greater than the standard variable rate - so make sure you do your sums or have someone help you.

Another way to make your savings work for you is to make use of a re-draw facility. This is where you can borrow money you've already paid off your loan that is above the minimum payment requirements.

Rather placing your savings into a savings account, your money goes into your loan account but gives you the ability to take that money out when you need it.

With this strategy you're paying less interest while your savings sit in the loan account.

It's important to check all the details about your loan before making any changes. Read the terms and conditions of the loan to confirm any fees and limits that may apply.

Craig says these tips can help with saving where you've also got debt:

1. Start now … the earlier the better
2. Continue to have a savings goal and stick to it
3. Keep track of your savings within your loan account so that you can feel a sense of achievement
4. Keeping track of your savings within the loan account also means you won’t re-draw more than your savings
5. Saving and addressing debts benefit from some attention – make time each week to keep up to date with your expenses, income and savings
6. Don’t be afraid to read about saving and debt, ask questions and continue learning about your money through mentors, your lending institution or an Adviser

Craig Benham is a Principal at Forsyths.