spend all your savings to save money

I know the whole point of this blog is to help you save money, but sometimes you have to be brave and spend that money you've saved.

If you have credit cards with outstanding balances, and you have money saved in the bank, then use it NOW to pay off your credit cards. Banks make their money by lending the money you have already given them. So if you have savings and outstanding credit card debts, you are in effect paying the bank to borrow your own money.

Here is an example: (thanks to MSE for this)

Johnny Comelately currently has £5,000 saved up, earning 4% interest after tax, in case of emergency, yet he also has £5,000 on credit cards at 18%. Thus while his savings are annually earning him £200 a year, his debts cost £900; overall he is paying out £700 a year.

Now compare what happens if he pays off his debts with his savings, with not doing so:

Situation A: No emergency happens

· No change. Keeping both debts and savings costs Johnny £700 a year.

· Pay off debts with savings. Johnny now neither earns nor pays any interest, thus is relatively £700 a year better off, and all the new cash he puts aside can actually go towards genuinely saving.

Situation B: After a year he has to pay £5,000 in an emergency roof fix

· No change. Johnny uses the savings for the emergency. This leaves him with no savings and £5,000 of credit card debt at 18%.

· Pay off debts with savings. As Johnny has no savings, he has to borrow the £5,000 on his credit cards. This leaves him with no savings and £5,000 debt on his credit card at 18%.

In other words, Johnny is in exactly the same position in situation B, regardless of what he does. Yet before the emergency he was £700 a year better off by paying off his debts with his savings.

I know it's hard to do, especially if you have been saving for years and now I am telling you to use it. But if you sit down and think, it makes total sense.