Tuesday, 19 August 2008

Money, Honey Part II: That Thing Called Debt

Picture thanks to toff955

(Read Part 1 first)

Unavoidably, modern day western life is all about the dough, the mullah, the mean greens. We crave it, money brings status, it brings stability, and it brings down right glamour! And not one of these words would we ever freely associate with student life. But, my sweets, it doesn’t have to be this way, no no!

Alright, so I’m not implying you can retire at 21 and drive off into the sunset in your Bentley, but glamour is yours for the taking, it’s just about using your noggin.

Don’t be afraid of student debt, but be realistic, this is money you have to pay back at some point, and if you ever want the Bentley dream to come true, you need to be mindful of the amount you’re stacking up.

A typical UK graduate can leave university in anywhere from £18,000 up to (and in excess of!) £30,000 worth of debt, ouch! But don’t press that panic button just yet. By simply understanding your debt, you can be in control of this amount and you’ll see it doesn’t have to be so scary.

Your student debt can come in more than one form.

Firstly: your government loan. If we accept that, at some point in life, debt is quite necessary, for example: when getting on the property ladder or buying your first family people carrier (joy of joys!) then student debt is the best kind you’re ever likely to get offered. It works like this: you borrow X amount, you pay X amount back. Yes, there is interest to consider, but this won't run much above inflation, you should only be paying back the 'portion' you borrowed. Money, pound for pound and across the board, will just be worth more.

If my explanation of this leaves your head reeling check out this.

The second, slightly scarier version of student debt is your 0% overdraft which any student account worth its salt will offer. By all means go for this facility. In fact, get the biggest overdraft you can (some student accounts offer up to £3,000!) but, a word of warning, be careful what you do with this money. Banks aren’t offering you this out of the goodness of their hearts, they’re not sat around a shiny board room table up in skyscraper heaven thinking ‘hopefully little Jimmy will be kind enough to pay off his overdraft one day...’ No siree. They’re thinking ‘reel the suckers in then, when they least expect it, we’ll hit’em with the interest.’ Banks reserve the right to demand their money back at any point and, if you can’t pay up, that little amount you owe will start to increase. I’m not talking inflation either. I’m talking that evil of all evils: bank charges. As soon as you stop being a student, if you’re not careful, your account may revert itself to standard commercial interest rates and what you owe will sky rocket.

Why then, have I inclined you to obtain this facility? Because, if you’re clever, you can actually make money from your overdraft. Think about it, if you can manage to get by on your loan, whatever you get from your parents and a part-time job; whack the full amount of your overdraft in a high interest savings account and at the end of three years you pay it back with cash to spare. Genius.

If you save £1000 over 3 years at a 6% interest rate that leaves you with £1,191.02

And that, kids, is free money.

A word to the wise however: don’t lock your money away in a fixed rate or regular savers account. Although these facilities have tempting interest rates, you want to be able to access this money as you never know what’s around the corner. If you try to get at this money before the end of a specified period, guess what? Bank charges!

Ideally, go for a mini-cash ISA as there are some pretty neat interest rates out there and you won’t pay tax on this money either. Do your research here.

The third slice of the pie that is student money will be all other kinds of commercial debt; student credit cards, standard bank loans and such. Trust me, you want to get into hell and high water before even contemplating this kind of debt. This is the debt with sneaky charges; this most certainly isn’t ‘free’ money. This is stupid money. Avoid it like the plague.

A teeny clause in this argument though, would be to take advantage of your student credit card, again keeping it smart! In life, a good credit score will fair thee well, and at this point in life is the time to start building yours up. Don’t think no credit = good credit. No credit = (what a coincidence…) no credit. Banks don’t like this. For whatever you may want to borrow in the future, banks want to see that you’ve borrowed, and paid back, and that other banks fancied your custom enough to let you do this.

So use this little card of yours but by golly be careful. Spend in small amounts, take advantage of 0% interest, and repay before you even get a sniff of those evil charges. Et Voila! A good credit score.

So, you’re thinking: where does glamour come into all this? The first step to glamour, darlings, is smarts. Being smart with your dough in this way, means more for now, more for the future, and a warm, fuzzy feeling of cunning at beating the system…

(Now read Part III on maximising your income)

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