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By Claire Stevenson Staff Writer
Monday, 9 March 2009
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THE recession has spawned a glut of information offering well-meaning but often ineffective advice on how you can make money and save money during the downturn.
While selling your books on eBay and using that two-for-one main meal voucher can help in the short term, you need to start thinking practically about the ways in which your money can work harder for you, and the financial outgoings you have that - with some careful planning - you can save money on.
Read on to find out how you can achieve this in 8 key financial areas.
Savings
Are your savings working hard enough for you? With interest rates at an all-time low, it may be time to give your savings account a health check:
- If your savings amount to more than £50,000, split them between different banking groups and not just between different banks that fall under the same umbrella group. This is because a scheme called the Financial Services Compensation Scheme covers the first £50,000 a person has in a financial institution. So no matter how many accounts you have with a bank, you'll just be covered for the first £50,000. Your banking literature or your bank's website will contain details of all the banks and building societies that make up the group's portfolio. If in doubt, ask.
- Consider opening an individual savings account (ISA). One of the main benefits of an ISA is the tax break. Savings accounts usually require basic rate tax payers to pay 20% on interest earned on their savings accounts but ISA savers don't pay any tax. However, because of the tax advantages, you're limited to how much you can deposit. You can put £7,200 a year into ISAs - £3,600 into a cash ISA and the rest can go into a stocks and shares ISA. You have until the 6th April of each year to save your allowance. Each year your allowance allows you to add to the total amount of tax free savings you have in an ISA - but each year you do not save, or if you withdraw the money, you lose all the previous year's allowances. The Co-operative Bank reckons that up to 73% of people will simply let this allowance go to waste - if you've got an ISA, make sure you use as much of your allowance as possible. Cash ISAs are often instant access accounts, so you can save your allowance without worrying if you need to access the money - and if you find you don’t need to access it, then you’ve made good use of a year’s allowance. If you want to switch your savings to an ISA, check out these deals on cash ISAs.
- Nationwide is offering 3.25% on its 3-year fixed rate ISA.
- Natwest's best deal is its e-ISA at 3.51%.
- Standard Life also looks a good deal with 3% on its Direct Access cash ISA.
- If a stocks and shares ISA is more your bag, then you're not alone. The poor interest rates on most savings accounts are forcing people to think differently about how they save. According to the Investment Management Association, people are returning to stock market investment in droves, plumping for equity over cash. Read Choose's guide to ISA saving accounts here.
Mortgages
One word. Overpayment. If you can afford it, try and overpay your mortgage whenever you can. The record low Bank of England Base Rate means that people on a tracker product have an ideal opportunity to overpay on their mortgages.
Overpaying just £200 extra a month could cut a £100k mortgage on a rate of 5.75% over a term of 25 years, by almost half. You will also save £39,000 in interest by the time your mortgage is repaid.
Many lenders will allow you to access what you overpaid if you need it back.
Check with your lender to see how much you can overpay every month without being stung by a penalty fee.
You can also consider:
- Offset mortgage accounts. Some mortgage deals enable you to offset your mortgage against money in your current account or savings. This means you can pay off your mortgage early because most offset accounts calculate interest daily, and so every pound you deposit in savings helps to reduce the cost of borrowing on the mortgage.
- Checking when your current fixed rate deal ends. Don't get stung by the lender's standard variable rate - there's no need and they're higher than fixed rates anyway. Check when your deal ends and make an appointment with your lender to see which other fixed rate mortgage deals are available. Do it in good time - don't leave it until the last minute.
Credit Cards
It pays to be prudent with your credit cards.
Be very careful not to withdraw cash on your credit card - even if it's to pay a loan or mortgage instalment. Cash withdrawals with a credit card can be charged at almost double the interest rate of purchases. They also carry handling fees, and have no interest-free period, so you'll be charged interest as soon as you withdraw the money.
Also bear in mind that:
- If you have a good credit rating and always repay your balance in full each month you should be spending on a cash back credit card that will earn you free money just for using it. See our comparison guide on cash back credit cards for more information.
- Credit cards offer purchase protection under Section 75 of the Consumer Credit Card Act 1974. This means that your credit card supplier is held liable by law as the supplier, on all purchases over £100 and under £30,000. If a problem occurs with your purchase, such as non-delivery or the seller goes bust before you receive your goods, you can claim back the cost of goods from the credit card company. Debit cards don't offer this protection.
Current Accounts
Have you considered whether your current account is working hard enough for you or do you simply let your money languish without a decent interest rate? Have you plumped for a vantage account where the bank charges you a fee in exchange for some extras? Read on.
- Get the best from packaged current accounts. If you pay a fee to your bank in return for extras such as travel insurance, car insurance or even high interest rates, make sure you get your money's worth! Consider switching to a normal current account if you don't use the benefits – and if you do use them, make sure they're worthwhile. Is free mobile phone insurance really worth it if your phone costs less than £50 or has dated quickly?
- If you think you're going to go overdrawn at any point, agree an overdraft rate in advance. Going overdrawn can be a necessary evil for many of us. But if you agree in advance with your bank an amount both it and you feel comfortable with - and you never go over this amount - you won't get stung by the high unauthorised overdraft rates which most banks charge. Instead you'll get charged a nominal fee or nothing at all.
- Make your money work harder in a high interest current account. They do exist - despite the base rate being so low - but you need to be able to deposit substantial lump sums – and maintain a healthy balance - to get the higher rates. For example, if you can deposit a lump sum of £500 a month (e.g. have your salary paid in), Alliance and Leicester pays 6% interest on balances of up to £2,500. There's also instant access to your cash.
Insurance
If you're savvy then you'll compare the insurance you want to renew rather than accept your provider's new quote as the cheapest. But there are other deals to consider too:
- Dual products. For example, a lot of home insurance providers offer free contents insurance when you take out buildings insurance but they tend to be for new customers only.
- Existing customers should ask about any discounts available if they've got other insurance – eg car insurance - with the same provider. Don't be shy.
Pensions
If your pension is in the hands of the stock market, don't rest on your laurels and think it'll all even out eventually and you'll get the mega-bucks payout that was first illustrated to you. Think about making an appointment with your pensions adviser to ask how each fund is performing. Consider switching funds if they're not performing well.
- Bear in mind that with stakeholder pensions, you're not covered by the £50,000 savings rule that was mentioned earlier. But you are covered under long-term insurance rules which usually mean the first £2,000 and 90% of the pension are safe.
Utility bills, broadband and other outgoings
If you're thinking about switching supplier, bear in mind that most suppliers work on a cyclical basis - when one cuts prices, others will follow. And consider all deals - online or otherwise. So:
- Don't get caught out by switching supplier in the middle of when they're all cutting their prices as you won't benefit from the bigger picture - when every firm has made a cut or stated their intention to stick with current rates. Go to one of the major comparison sites for a comprehensive overview.
- Get an online energy account. These deals are usually the cheapest but it's best to do your homework and compare a few suppliers. They usually require you to input your meter readings online and they will adjust your bill accordingly. You pay by Direct Debit, which is great because you can budget for exactly the same amount leaving your account every month. And if your meter readings are less than estimated, or your readings reveal you're paying too much, the energy supplier can reimburse you for your overpayment.
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