When life’s unexpected costs pop up, like an urgent home repair or that much-needed new phone, knowing how to manage your money is vital.
Deciding whether to borrow or pay outright can feel overwhelming, especially when you’re balancing your day-to-day expenses with your longer-term goals. You don’t need to be a financial expert to make smart choices, but you do need to approach these decisions with awareness.
Establish a detailed budget
You might think you have a good sense of your finances, but until you sit down and list out everything, you might miss key details. Start by listing all your monthly expenses, including rent, utilities, food and any debt repayments. Don’t forget the little things like your Netflix subscription or occasional takeaways.
Once you’ve got the basics down, review your income and see how much extra you have each month. This is where you get clarity on whether you can afford to pay outright for certain purchases or if borrowing might be the better option. For example, if you’re thinking about upgrading your phone, knowing your monthly disposable income will tell you whether you can afford it upfront or need to spread the cost.
Understand the cost of borrowing
It’s easy to get swept up in the idea of borrowing but you need to understand the full cost before making a decision.
Loans and credit cards come with interest, which can really add up over time. For example, a £500 purchase on a credit card with 20% APR might seem manageable, but over a year, you could end up paying £600 or more, depending on how long it takes you to pay it off.
Before borrowing, always calculate how much more you’ll pay in interest and make sure you’re comfortable with that total.
Build an emergency fund
This fund should cover three to six months’ worth of expenses, so that if something unexpected happens, like a sudden job loss or an unexpected car repair, you have a financial cushion to fall back on.
Having an emergency fund means you won’t have to rely on credit cards or loans when life throws a curveball. For example, if your washing machine breaks and costs £400 to replace, you won’t have to add that to your credit card balance if you’ve already saved up for emergencies.
Consider paying annually vs monthly
When deciding whether to pay outright or borrow, think about how you’re paying for things on a regular basis. For instance, your car insurance might be cheaper if you pay annually instead of monthly. While it might feel like a bigger chunk of money upfront, paying in one go can save you money over the year.
On the other hand, if you’re paying for something that doesn’t offer a discount for annual payments, or if you’re struggling with cash flow, monthly payments might be the better option. Just make sure you’re clear on the terms and any potential hidden fees.