Millions of people are unknowingly in the dark about spending traps that can seriously damage their future economic well-being. Experts like Andrew Hagger and Alastair Douglas emphasize the importance of being proactive with one’s finances, particularly when it comes to managing current accounts, overdrafts, and savings. By understanding these four commonplace missteps, advocates can sidestep them successfully. This newfound knowledge will greatly improve their fiscal fortunes and allow them to get the most from their dollar.
The biggest problem comes from letting too much cash just sit in checking accounts that pay very little to zero interest on deposits. According to Hagger, that’s one of the biggest missteps people take, saving too little and missing out on significant earnings. A new report by TotallyMoney has unclear how many people are overdrawn, finding that it’s 9.7 million. They’re in the red on average by £709, leading to hundreds of pounds in overdraft charges and high interest rates.
The Cost of Overdrafts
According to TotallyMoney, the average overdraft rate is between 35% and 50%. At this high interest rate, that compounds quickly. It would impose a regressive financial burden on all consumers who rely on overdrafts and dismisses less harmful alternatives. For instance, someone maintaining a £709 overdraft at a 39.9% interest rate would incur £283 in interest charges over twelve months. This example shows the need for strong overdraft management practices.
Hagger further recommends that people look to move the money they owe on an overdraft payment to a cheaper alternative. It might take only £28.28 to shift £709 over to a 0% credit card. That’s a huge saving in comparison to the exorbitant interest incurred from an overdraft! By leveraging these and other less burdensome options, people save costs and make paying those costs more manageable.
Douglas believes it’s essential for people to understand what they can do with their money, and how much that will cost them. “The bottom line is that packaged accounts make banks a lot of money,” he states. These accounts often come with monthly fees, but provide numerous perks in exchange. Consumers only benefit if they make the most of those advantages.
The Importance of Savings
Financial experts often suggest keeping three to six months’ worth of outgoings easily available. That doesn’t have to involve stashing money in a short-term, low-yield checking account. Hagger draws attention to a clever maneuver. In fact, moving even £2,000 from a zero-interest account into an easy-access account earning 4.5% could net them £90 of free money in a year.
The good news is that easy-access accounts tend to be very competitive at the moment, with some accounts paying over 4.5%. Take Santander’s Edge Saver account, which pays a market-leading rate of 6%, but only on balances up to £4,000. Atom Bank currently pays 6% on their easy access account. For example, if a person saves £3,600 at the beginning of the year, they would receive an extra £171.
To get the good spending habits they want, people need to be smart about where they store their savings, Hagger recommends. This model allows you to earn the most amount of money possible. Additionally, it shields your money from arbitrary expenses associated with overdraft or low-interest transactions.
Smart Banking Choices
Whether it’s equity in the banking marketplace or simply picking the right products, consumers need to think about their own situation and desires. Douglas advocates for a more tailored approach: “You might be better off picking and choosing the parts that work for you and paying for them separately.” This approach saves Americans money by avoiding harmful fee practices. It allows them to select transactional accounts that are more aligned with their preferred spending behavior.
For the last few years, Americans have been regularly changing their banks. In fact, last year by Pay UK’s own figures, almost 1.2 million customers switched their banking provider. Such shifts reflect a growing awareness among consumers regarding the importance of finding the right banking solutions for their financial situations.
Packaged current accounts tend to offer out-of-the-box value-adds like travel insurance and cashback benefits. They are only beneficial if consumers take advantage of these options. Too many consumers don’t take advantage of these benefits or don’t know how to, leading them to waste their money on avoidable monthly charges.