Martin's spooky money-saving tips
Today it’s Halloween, and while the witches, ghosts and vampires might be out on the streets tonight, according to our Money Saving Expert Martin Lewis, nothing is scarier than letting the bogeyman get at your finances. So Martin’s here with his five financial frighteners – things that horrify him when he hears people talk about their money.
1. Saving while you’ve got expensive debts
Saving while you’ve got expensive debt is a nightmare. Savings rates are so low at the moment – the top easy-access rate is 1% – so you’d be paying far more in interest on the cards than you’d earn on your savings. Think about it, a £1,000 credit card debt at 18% costs £180/year, while the same amount saved in top paying savings account only earns you £10. Pay the debt off with your savings and you're £170/year better off.
You may be thinking "But I'll have no savings if the boiler packs up or the roof falls in."
Yet imagine this scenario – you’ve £1,000 on a card and £1,000 in savings. If you stay that way and an emergency happens that costs £1,000 to fix, you’d have no savings and still £1,000 of credit card debt.
Yet IF you paid off the debt with the savings, if a £1,000 emergency happens, you can just put that on the credit card. The end position is the same. No savings and £1,000 on a credit card – yet you would have saved on the interest meanwhile.
If your debt is at 0%, then it is different. Here the financially savvy and disciplined can do what’s called stoozing. That’s where you deliberately build up 0% debt only to save it and earn interest. Though with current saving rates so low, it’s not as easy as it used to be.
2. Not at least asking your energy firm are you on its cheapest deal
At least 70% of people are massively overpaying on their energy bills by on average £300/year by staying on their provider’s most expensive standard tariff rate. Yet it’s really easy and quick to switch to your cheapest. I ran through how to do it last week, but as a quick reminder to find your cheapest tariff just plug your details into Martin’s ‘Cheap Energy Club’ or any other Ofgem- approved comparison site and it'll tell you the best deal for you.
But if you really don’t want to switch then at least ask your provider what its cheapest tariff is and switch to that. For example, right now if you’re on British Gas’s standard tariff you’d be paying £1,044/year, compared with its much cheaper ‘hidden’ tariff by Sainsbury’s Energy (I say hidden because it’s run by British Gas just under a different name) at £804/year for 12-month fix – a saving of £240/year. Or if you're on EDF’s standard tariff, which with typical usage is £1,070/year, you can switch to its cheapest 12-month fix, which is £880/year – a saving of £190/year and you haven't even changed supplier.
So first do a comparison and if you really don’t want to switch (not a big deal to do it, but some don’t like it) then ask your provider what its cheapest tariff is and at least switch to that. Also, some big suppliers offer far cheaper deals via ‘collective switches’ through councils or comparison sites. So you may find you can save £100s and just stay where you are.
3. Only making the minimum repayments on credit cards
Repaying only the minimum balance on your credit card not only means it’ll take you much longer to clear the debt but it’ll cost a lot more too. That’s because the minimum payment isn't a fixed amount – it's usually a percentage of the balance. So the amount you repay each month will fall as your balance reduces, meaning it takes longer to clear.
The numbers here are truly frightening. For example a thirty year old with £3,000 debt on a credit card at 17.9% interest, making only a typical minimum repayments would take 27 years to clear, so you’d be 57 with a total cost in interest of £4,000.
Now you may be thinking ‘easy to say but I can’t afford more than the minimum.’ Well, I have a solution to that.
On £3,000 debt the current minimum is around £70 a month, instead of just opting to pay the minimum, if you fixed your repayment at £70 a month – which you can do as you’re paying it now – then you’d clear the debt in 5 years at a total cost of just £1,500 in interest, saving £2,400 in interest.
There’s one caveat though. If you have more than one credit card with debt on it, then always focus on repaying the most expensive card first. That means you should only make the minimum repayments on all others. That way you get rid of the most expensive debts first, and then focus on the next most expensive.
4. Covering your home’s value on home insurance
Quite often when it comes to buildings insurance many people tend to make the mistake of over insuring, by covering their home’s market value (the amount it might sell for). Yet you only need to insure the rebuild cost – so how much it would cost to rebuild your home should it get knocked down – which is often far less than the market value.
To find your rebuild value, it’s best to get a RICS surveyor (Royal Institute of Chartered Surveyors) out to survey your property, but this can be expensive, unless you're getting one anyway (eg, if you're buying a new home). A less accurate, but quicker option is using the Association of British Insurers' calculator.
5. Saving or borrowing to pay your children’s tuition fees.I’m often freaked out by parents telling me they’re saving up so their child won’t have to pay tuition fees at uni. Worse, I’ve even met some considering extending their mortgage.
My problem isn’t just the fact that actually the cost is to the student’s not the parents, but that this is often like throwing money down the drain.
All new English full-time students can get a tuition fee loan and a living loan to help pay for uni costs. This isn’t repaid until the April after graduation, at a rate of 9% on everything earned above £21,000, for 30 years until it’s wiped. In many ways it’s more like a tax. And so how many people would save up “in case my child earns enough to be a higher rate taxpayer”?
An extreme case helps this. Imagine you scrimp and save to pay the tuition fees. Then your child goes to uni and becomes a brilliant poet, but never earns above the £21,000 threshold. They would never have to repay the loan. So you’ve just thrown the £27,000 of fee money away.
Yet, what’s more likely is that they will earn over the threshold, but still not fully repay the loan. Often in real terms unless they’re a very high earner, they won’t earn enough to repay in full what they borrowed. So there’s a decent chance you’ll have paid more money than they’ll ever repay.
If you’re saving for them, don’t use it for tuition fees. Wait to see what they earn after university. A far better use of the cash is for a mortgage deposit (unlike student loans you still have to repay the mortgage even if your income drops, so reducing it helps). Only if you’ve done that and they’re a seriously high earner, then it’s worth paying off the fees.