Don't be a 'sinner'

ARE you a sinner? Financially that is. There are a host of everyday money misdemeanours that millions of people do, costing them thousands, without being aware of it. These aren’t horrors like grabbing a payday loan, but the result of simple misunderstandings, bad habits or inaction. Having recently toured around the UK doing roadshows for the upcoming sixth series of my ITV show (back 8pm on Tuesday, November 22), I’ve collated five of the most common.

1. Saving while you’ve expensive debts

Savings rates are depressingly low – the top easy-access rate is 1 per cent. Credit card and other interest rates are depressingly high. So £1,000 credit card debt at 18 per cent costs it costs you £180 a year, the same amount saved in top paying savings account at 1 per cent interest only earns you £10. If you had both, pay the debt off with your savings and you'd be £170 a year better off.

Many of you will be thinking, "but I want to keep my savings, what if the boiler packs up or the roof falls in?" However, that’s a sentimental strategy, not a logical one. Let’s carry on the £1,000 debt and £1,000 savings scenario to show you why.

- If you don’t pay the debt off with the savings and an emergency happens that cost you £1,000 to fix, you’d use all your savings and still £1,000 of credit card debt.

- If you do pay off the debt with the savings, and a £1,000 emergency happens, you’d need to pay for it on your credit card, meaning you still have no savings and £1,000 of credit card debt.

The end result of them both is the same, yet by paying off the debt with the savings, you save in the meantime.

The only exception is if the debt is at 0 per cent. Then the financially savvy and disciplined can do what’s called stoozing, where you deliberately build up 0 per cent 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. Full help on that at mse.me/stoozing

2. Not at least asking your energy firm are you on its cheapest deal

Most people in the UK are on their energy firm’s standard tariff, which typically means they’re overpaying by £300 a year. I’ve talked about switching until I’m blue in the face, and, of course, the best plan is take five mintues to do a full market comparison via my CheapEnergyClub.com or any Ofgem.gov.uk approved comparison site.

Yet for some that doesn’t hit home. So let me be plain. Even if you won’t do that, just pick up the phone and ask your current provider “Am I on your cheapest tariff?” and, if not, switch to that as there’s no change but the price!

For example, as I write (it can change daily), on EDF’s standard tariff someone with typical usage pays £1,070/year. It also has a 12 month fix at £880/year - £190/year less.

British Gas’s standard tariff with typical use is £1,044/year, but it also runs Sainsbury Energy (ie, it’s the same company but a different name), and its cheapest fix is £804/year – saving £240/year.

This don’t ask don’t get saving works at all the big firms, so if you won’t do a comparison, at least do this.

3. Only making the minimum repayments on credit cards

Credit card minimum payments are based mostly on a percentage of the balance, which only just covers the interest. So you hardly clear any off.

A 30-year-old with £3,000 debt on a credit card at 17.9 per cent interest, who made only typical minimum repayments, would take 27 years to clear it. By then, they’d be 57 and have paid a total cost £4,000 in interest (see my minimum repayment calc at mse.me/minrepay to work out how long it’ll take you).

Now you may be thinking ‘easy to say, but I can’t afford more than the minimum.’ Well, I have a solution.

On £3,000 debt, the current minimum is around £70 a month. If instead of opting to pay the minimum, fix your repayment at £70. The debt will clear in five years at a total cost of £1,500 in interest, saving £2,400.

Though if you’ve debt on more than one credit card, focus all spare cash on repaying the most expensive, making only the minimums on the others. That way you get rid of the most expensive debts first.

4. Don’t cover your home’s value on buildings insurance

Your house price is the wrong figure, you only need to insure the usually much lower rebuild cost – literally how much it would cost to rebuild your home should it get knocked down. This is often far less than the market value. There’s information and a calculator on this at http://abi.bcis.co.uk.

5. Saving or borrowing to pay your children’s tuition fees

I’m often freaked out by parents telling me they’re saved up so their child won’t have to pay tuition fees at uni. Worse, some even extend their mortgage. My problem isn’t just that actually it’s students’, not parents’ responsibility to repay this…

All new English full-time students can get a tuition fee loan and a living loan to help pay for uni costs. You’re eligible to start repaying in the April after leaving, but only if you earn over £21,000, and you repay 9 per cent above that. Repayments stop after 30 years. In many ways, it acts far more like a tax than a loan, and how many would save “in case my child earns enough to be a higher rate taxpayer”?

An extreme example provides clarity. Imagine your child goes to uni and becomes a brilliant poet, who never earns above the £21,000 threshold. They would never repay a penny. So if you paid the fees for them, you’d throw £27,000 away.

Most of course will earn over the threshold. However only high earners will earn enough to repay in real terms what they borrowed within the 30 years. If not, again it means pay their tuition fees and you’re paying more than they’d need to repay. For most parents if you want to help them, a better thing to prioritise is building up a mortgage deposit. For far more on this see my mse.me/dontpayupfront guide.