Money for beginners: Wealth warnings

I ONCE met a man with £80,000 in savings earning less than one per cent interest, while he had £80,000 outstanding on his mortgage – yet he said he was good with money.

Like many, he thought being thrifty and a careful budgeter were enough. In fact, he even boasted how he didn’t let the little lady near the books.

Ignoring this touch of machismo – both parties in a relationship should know the details of the finances, because death and divorce happen – the real problem was the fact that you need to learn to understand how money products work.

As many are doubtless taught at David Brent-style management training, “if you assume – it makes an ass of U and ME!” So here are some wealth warnings based on things I’ve come across during my TV money makeovers. A couple stretch back a few years, so apologies if my memory deviates slightly from the reality.

Savings bigger than his mortgage.

WITH £80,000 mortgage debt at over six per cent interest, just switching to a better deal would have cut £100 a month of this older family man’s costs. As his mortgage had been untouched for years, it wasn’t going to prove difficult.

The irony was he had savings for a similar amount with the same back.

The savings documents languished in a draw and showed the interest was sub-one per cent – and that was prior to the scything interest cuts of recent years.

In other words, he lent his bank £80,000 at one per cent by saving and it lent him back the same cash at six per cent in the form of a mortgage.

The family cleared the mortgage with savings and was £5,000 a year better off. They reduced their costs by nearly £50,000 by the time the loan was due to be cleared.

The wider rule: Pay off your debts before saving. The cost of debt almost always dwarfs the amount earned from savings. So clearing debts is normally the most efficient, risk-free thing you can do with your cash (see moneysavingexpert.com/repaymortgage).

Missing 0 per cents

AS often happens in the run up to a makeover, the family knew the cameras were due and started to try to sort out their own finances. It’s a bit like people who dust and polish a house because they know the cleaner’s coming.

In this case, she had more than £10,000 of outstanding loans and credit cards and applied for a new, though sadly not market leading, 0 per cent balance transfer credit card.

Yet the card had a £6,000 credit limit, and they’d only shoved £2,000 on it. She’d failed to realise they could move other card debts to it too.

As they had a host of other cards at 15 per cent-plus interest, filling this up would save over £600 a year.

The wider rule: Before making new card applications, utilise your existing credit more efficiently. This helps to protect your credit score and can mean savings even if you get rejected for new credit.

To do it, check all your cards’ interest charges and find out if there’s room on your credit limits. Call up each provider and ask “will you give me a special cheap rate if I move debts from other cards to you?”

You’ll be surprised how often they say yes, MBNA and Barclaycard especially.

Then shift the debt to where the interest rate’s lowest.

Even if you’re not offered a special rate, eg, you’ve one card at 16 per cent and one at 18 per cent, shift the debt from the more expensive card to fill up the cheapest card’s credit limit. If you still need more cheap credit, apply for a new deal to shift all remaining expensive debts. See moneysavingexpert.com/balancetransfers for all the current best buys.

It’s rebuild, not market values, that count for home insurance

IN the days of house price boom, one man each year at renewal proudly changed the ever-escalating house valuation on his insurance form (the same man as had the savings and mortgage). When I arrived, his premium was well over £1,000 a year.

Yet it was completely wrong. For buildings cover, it’s a property’s rebuild value that counts. This is literally the amount it would cost to rebuild a property from scratch if it was destroyed, usually substantially less than the market value. In fact, even with his own expensive insurer, reinsuring at the rebuild rate slashed the cost to £250 a year.

The wider rule: Know what you need to cover and take time to value it correctly. Under-covering is just as damaging as over-covering. For example, if you have £30,000 worth of contents, but only cover £10,000, don’t assume it will be fine.

Imagine £1,000 damage to your kitchen. While that’s within your cover limit, the insurer may check your value of contents, then only pay out in proportion to what you’ve covered, in this example a third of the value of the damage.

Yet it’s possible to get adequately covered home insurance super cheaply. The best route is to comb comparison sites and check if you can get hidden cashback on top. The record result using this system is actually being paid more than £60 to get home insurance, as the cashback was higher than the policy cost. For full step-by-step instructions see moneysavingexpert.com/home insurance

Don’t hide debts from yourself

FAMILIES in debt often try to hide it, even from themselves. The classic way to do this is to periodically shove credit card and loan debts onto a mortgage and then consider it vanished.

In one worrying case, a family who’d raised their concern about £20,000 debts, equivalent to nearly a year of their after-tax income, told me it had taken about a decade to build up.

That seemed a slow burn rate considering their spending habits. Only later in the day did it turn out they had remortgaged three or four times during that period to clear debts totalling more than £100,000. So rather than a £2,000 annual overspend, it was far closer to £12,000. And while they knew this in their head, as it was done and dusted it didn’t really count.

The wider rule: Persistent borrowing is a vicious symptom of overspending.

If you have debt and it’s not from a one-off planned, budgeted piece of borrowing then it’s almost certain you’re spending more than you earn and that’s a critical danger signal.

Keep it up and you risk a debt spiral, borrowing even more to enable you to continue your existing lifestyle and repay other debts. The end result is there’s nothing left.

The most important thing to do is a hardcore budget. This means looking far beyond a typical month’s expenditure, that misses things like the daily coffee, weekly shop, annual holidays or changing car every five years. Say you spend £600 a year on Christmas – that should count as £50 a month.

Only by doing it that way can you truly see where you stand financially and how much you need to restrain your spending. To help, I have a free automatic tool at moneysavingexpert.com/budgeting.

Put your situation in and it instantly calculates whether you’re overspending or not.

Burger King 2 for 1s

There are bags of 2 for 1 deals to be had a Burger King. Just go to burgerking.co.uk/offers to print a page with 16 vouchers for 2 for 1 burgers, as well as loads of other offers. Offers include a free cheeseburger with any large drink, free fries and a drink with an adult burger, and a free drink and hash browns with any breakfast sandwich. The vouchers are valid until Sunday, February 14.

Multi-region Blu Ray player £50

HMV has a Limit brand multi-region Blu Ray player for just £50 in-store (it’s £80 online). You can watch Blu Rays and DVDs, as well as content stored on USB sticks, and compressed formats like MKV (Matroska) and DivX. This is sure to be popular, so it’s worth phoning ahead if you want one.

* TV money guru Martin Lewis runs the consumer revenge website MoneySavingExpert.com; ensure you get his weekly email so you’re constantly saving money.