When to Dip Into Your Savings

Everyone knows that a smart financial goal is to have an emergency fund in the bank for when disaster strikes. However, having built up a substantial nest egg, it can be very tempting to dip into it for less than urgent expenses.

It is common for money to be held in a High Yield  Savings Account such as an ISA where it is possible to withdraw the funds without penalty. However, while it is possible to withdraw money from an ISA or similar product without incurring charges, there are tax restrictions over how much can be paid into an ISA each year, so the money may not be able to be easily replaced.

Having a lump sum in an ISA can bring a feeling of security and it can be very tempting to chip away at the money for items that aren’t really essential.

Of course, everyone has emergencies, such as the boiler blowing up, when the costs involved are substantial and this is exactly the kind of scenario that an emergency fund is there to pay for. But does wanting a new kitchen because the current one is a bit out of date really warrant splurging your hard-saved ISA cash?

Before dipping into your ISA, there are two questions you should ask yourself.

  1. Firstly, how long is it going to take me to repay this money into my ISA and what happens if there is a real emergency before I do?
  2. Secondly, what would happen if I didn’t make this purchase right now?

Taking the time to think about how hard you have had to save to put the money away can sometimes act as a deterrent to frittering it away on items which couldn’t really be described as an emergency.

Also, thinking about the consequences of not spending the money can sometimes put matters into perspective. Is it really important to buy that item now? Would it really make a difference if I waited until I could save up for it? For those expenses which really can’t wait, it is worth considering whether there are better alternatives than splashing the cash from your ISA.

To do this, you need to find out how much interest you earn from the money in your savings account. Also, if your money is invested in something other than an ISA, whether there are any financial penalties or charges for withdrawing the cash. Once you know how much money you will earn by keeping the money in the bank, you can work out how much you will lose by withdrawing it. Then compare this to the interest you would pay on a credit card, overdraft or loan – you may find that paying for the purchase on finance costs you less than the amount you would lose by withdrawing your savings. This is especially true right now as there are many 0% interest credit cards around.

If the money is not needed for a specific purchase but just to pay for ongoing living expenses, it is time to take a long hard look at your budget as by regularly dipping it for small items, you will find your funds wiped out in no time.

Identify any items that you could either do without or could shop around to get cheaper elsewhere, such as insurance and commit to actually doing it. Research has shown that most people stick with their providers even when they are more expensive.

Another way to save money is by considering different ways of doing things, for example, shopping online not only saves on gas but better deals can sometimes be found. Make the most of discount sites and offers and your dollars will go further – leaving the money in your savings untouched.

Article provided by Les Roberts, freelance journalist and personal finance writer at moneysupermarket.com

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