When a large cost comes up and you have money saved, there are two obvious ways to pay: use the savings, or keep them and borrow. The right answer depends on the numbers, on how secure your finances are, and on what you would have left afterwards.
This V5 Solutions guide works through the decision as a series of questions, with a worked example to show how the costs compare in practice.
Question 1: What Does Each Option Actually Cost?
Using savings costs you the interest those savings would have earned. Borrowing costs you the interest and any fees charged by the lender. Comparing the two is the starting point.
A worked example
Imagine you need £2,000 for an essential repair. Your savings account pays 2% a year, and the alternative is a personal loan at 15% APR, repaid monthly over 12 months. The figures here are purely illustrative.
- Using savings: you give up roughly £40 of interest over the year.
- Borrowing: you pay roughly £155 in interest over the year.
In this example, borrowing costs almost four times as much as spending the savings. The rates you see will differ, but the pattern is usually the same: lenders charge more than savings accounts pay. If you are a higher earner, tax on savings interest can narrow the benefit of keeping your money where it is even further.
Question 2: Would You Still Have an Emergency Buffer?
Cost is not the only consideration. Savings also give you resilience. If paying for this expense would empty your account completely, the next unexpected bill would have to go on credit, possibly at a higher rate and at a worse time.
One approach is to decide on a minimum balance to stay above. To work out a figure, calculate your essential monthly outgoings using our guide to the key figures in your budget. One month of essentials is a reasonable floor for many households, with three to six months as a longer-term goal.
Question 3: Can You Access the Money Without a Penalty?
Not all savings are equally available. Check the terms before you withdraw:
- Fixed-term or notice accounts may charge a penalty, usually in lost interest, or may not allow early access.
- Cash ISAs differ. A flexible ISA lets you replace money withdrawn in the same tax year without it counting towards your allowance again. With a non-flexible ISA, money put back uses up more of your allowance.
- Lifetime ISAs charge a government withdrawal charge unless the money is used for a first home, you are aged 60 or over, or you are terminally ill.
- Pensions are designed for retirement and usually cannot be accessed until a minimum age, so they are not generally available as emergency savings.
Question 4: How Secure Is Your Income?
If your job is stable and your budget has some slack, rebuilding savings after spending them is realistic. If your income is uncertain, for example during a period of redundancy risk, some people choose to hold on to cash even though borrowing costs more. Our guide to recession-proofing your finances covers how to prepare for that kind of uncertainty.
Making the Decision
Putting the questions together shows the pattern many people follow:
- If the cost is essential, the money is accessible and a buffer would remain, using savings is often the lower-cost route.
- If using savings would leave nothing in reserve, some people use part of them and cover the rest another way.
- If the cost is not essential, waiting and saving for it is another option.
Whichever route you choose, a regular transfer to rebuild savings, treated like a fixed bill paid on the day income arrives, is a common way to restore the balance. Small, regular amounts add up, and our summer saving tips may help you find the money.
This article is general information, not financial advice. If you find that savings or credit are needed simply to cover everyday costs, or you want free, impartial help with your own situation, guidance is available from MoneyHelper and Citizens Advice.
