Analysis: Face facts – there’s no borrowing our way out of trouble

By SCOTT MACKINTOSH
Published on Saturday 11 February 2012 00:00

THERE is a number of reasons why people are finding it difficult to save in the current financial climate. People are still feeling cautious about investing given the uncertainty in world markets and economies, even though we continue to see a rise in valuations.

We are certainly seeing, and advising, more people making overpayments into their mortgages and other borrowings while interest rates remain historically low, and, given it is likely that interest rates will remain low for the foreseeable future, this is great for borrowers. It is not so great for savers with deposit accounts.

For some age groups, particularly among those aged 35 to 44, there are many competing demands for their money and, in some cases, it is not possible to put aside as much in savings as they might want.

However, we have been advising clients to find a balance between paying off debts and saving/investing as, while reducing debts wherever possible is advantageous, it is as important to save for the long-to-medium term and ensure there is provision for emergencies or a goal such as a holiday, retirement, school fees and university planning.

However, the statistics may suggest that people are more inclined to repay debts, or indeed just spend.

Also, we live in a very social society and it may be that 33-to-45-year-olds are moving into what you might call “social living”. Even during tough economic times, you continue to see city centre bars and restaurants bustling and you wouldn’t be blamed for thinking “what recession?”

People are still spending more than they save. However, it is always a good idea to put money aside – you may lose your job or become unable to work through illness, and savings can help you in those circumstances.

In terms of saving for the longer term, there continues to be growing pessimism with pensions. Unfortunately, getting people to understand pensions and appreciate the benefits, not just the disadvantages of pensions is a battle. People have lost belief in what long-term savings look like and we are struggling to understand what long-term financial security might look like.

For a number of years, we seem to have become dependent on borrowings as our emergency funds or short-term fix, but with long-term consequences.

This generation has become accustomed to borrowing to sustain a lifestyle – that needs to change.

We need to spend what we can afford and not spend what we earn. Although we are in a period of uncertainty, there is no doubt things have to change – and in some ways they are changing for the better. When I was moving into my career, borrowing for your first car was encouraged, buying your clothes on credit cards was too, and that is partly what has lead to our “borrowed generation”. If you are a teenager today trying to borrow money, it is difficult. The next generation will understand that you have to save in order to create long-term financial security. It is not too late for us non-teenagers and, as ever, taking advice is key.

• Scott Mackintosh is director, EIC – independent financial advisers

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