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Case study · Run your own money
The Adeyemi household sorts out its money
A case study for the end of "Run your own money": costly debt, an emergency fund, a fixed or easy-access account, and two car-loan offers.
General education, not financial advice.
Tolu and Sam Adeyemi share a household budget. The people and offers are made up, but the figures are typical of real offers. This is a worked example for an imaginary household, not advice for your own situation. Work through the task yourself first, with the lessons and calculators open, then compare your answers with the solution step by step.
Their situation today
| Item | Amount | Rate |
|---|---|---|
| Current account | 5,000 | 0% |
| Credit card balance | 2,400 | 24.9% a year |
| Inflation (latest figure) | 3% a year | |
| Essential costs | about 2,000 a month |
Savings offers they found
| Account | Rate | Conditions |
|---|---|---|
| Easy access | 3.5% a year, variable | Withdraw any time |
| Two-year fixed | 4.4% a year, fixed | No withdrawals for two years |
Car-loan offers for 8,000 over three years
| Offer | Fee | Monthly payments | Advert |
|---|---|---|---|
| A | none | 36 × 245.89 | "6.9% APR"* |
| B | 300, paid up front | 12 × 180, then 24 × 280 | "0% for a year!" |
*As in the UK, the APR here is a yearly rate with the monthly compounding already included.
Your task
- Should they pay off the credit card from their current account first? Show the money involved over a year.
- After that, how should they split what is left between the easy-access and the fixed account? What is the real rate on each?
- Which car loan costs less in total? Does the answer change if you compare the payments in today's money, using the easy-access rate?
- Write two sentences they could act on.
Solution
Try the task first, then open one step at a time and compare.
Step 1: the credit card
If the balance stayed the same for a year, the card costs at least 2,400 × 24.9% ≈ 598 in interest (more in practice, because card interest is usually added monthly). The same 2,400 in the easy-access account would earn 2,400 × 3.5% = 84.
Paying off the card is like earning a guaranteed 24.9% a year, far above any savings rate. Pay it off first. This is the "costly debt" rule: clearing expensive debt usually beats saving or investing.
Step 2: the emergency fund and the fixed account
After paying the card, 2,600 is left. Real rates, using the exact formula (1 + rate) ÷ (1 + inflation) − 1:
- Easy access: 1.035 ÷ 1.03 − 1 ≈ 0.5% a year (before any tax on the interest).
- Two-year fixed: 1.044 ÷ 1.03 − 1 ≈ 1.4% a year.
Over two years, 2,600 becomes about 2,785 in easy access and 2,834 fixed: a difference of about 49.
The fixed rate earns more, but the money is locked away. A household needs an emergency fund it can reach at once (a broken boiler, lost income); a common guide is three to six months of essential costs. The usual approach is to keep that part in easy access and fix only money they are sure not to need for two years. Their essential costs are about 2,000 a month, so 2,600 is less than two months' worth: all of it is emergency money, and easy access is the sensible home. 49 over two years is a small price for being able to reach it. Once the emergency fund is built up, extra savings could go into a fixed account.
Step 3: the car loans
Totals paid:
- Offer A: 36 × 245.89 ≈ 8,852.
- Offer B: 12 × 180 + 24 × 280 = 2,160 + 6,720 = 8,880, plus the 300 fee = 9,180.
Offer B's "0% for a year" hides higher later payments and a fee: it costs about 328 more in total.
In today's money (present value, discounting each payment at 3.5% a year): about 8,398 for A and 8,686 for B. B's low early payments help it a little, because later money is worth less today, but A is still cheaper by about 287.
Step 4: what they could do
Pay off the credit card now and keep the remaining 2,600 in easy access as their emergency fund. If they buy the car, Offer A costs less however you measure it; the "0%" headline on B is the sales pitch.
Check yourself
Nothing here is graded or saved.