Monday, 3 September 2012

Are your savings gathering more dust than interest?

Funny things, human beings. And never funnier (I mean in the strange sense, not ha ha) than in our dealings with money. If you doubt that, then test which side of your brain is managing your money

We search for the cheapest jar of coffee in the supermarket, tutting at the 30p price difference per jar, then hand over £2.45 for a single cup in Starbucks.
We leave our savings to fester away gathering more dust than interest, while at the same time carrying credit card debt.

Do you know what you;re saving for?
This very specific pot is by terramundi
Behavioural economists call this illogical behaviour mental accounting – or treating money differently depending on its source or label, something I've discussed in earlier blogs about using the left brain a bit more. 
An example is our attitude to money we’ve saved and money that’s dropped into our laps (I know, but bear with me on this one)... 
Would you blow your savings on a big birthday party extravaganza? Probably not, unless that was what you’d be saving for. It would seem too… reckless? Irresponsible? 
But what if you got an unexpected tax rebate and had a big birthday coming up? Woohoo, champagne cocktails all round!

I got to thinking about all this while working on a campaign for first direct, the online bank, to do with offset mortgages
Apparently nearly all mortgages in Australia are offset. They originated there and it's what most people go for.
Yet a mere 6% of UK mortgages are offset mortgages. This is probably because this concept feels a bit alien to us. After all, when mental accounting, we Brits have kept our borrowing and our savings very separate. It doesn’t even occur to us that we could use one to offset the other. Mentally they are two disconnected amounts of money.
Of course another reason we shun offset mortgages is because we don’t even know what they are.  
Offset mortgages simply allow any savings or current account balances to be offset against the mortgage, with interest only being payable on the difference between the two.
o   e.g. if a borrower has a £100,000 mortgage and £10,000 in savings, they will only pay interest on the difference (i.e. 90,000).

Dead easy really. You use your savings to work for you, but still hang on to them. 
This makes real logical sense for anyone who has both savings and a mortgage, and now more than ever before. Savings interest rates are so abysmally low at the moment, the loss of interest on them would be more than outweighed by the reduction in mortgage interest.

For more info check out the first direct website

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