LET’S CUT T O THE CHASE...
THESE FALSE TRY AND SAVE MONEY,
WE ARE all looking for ways we can cut back at the moment, trying to ease the pressure on our household budgets.
Eight in 10 of us are worried about the cost of living, and half are unsure about the future, so it’s hardly surprising that more than nine in 10 people say they are doing something to cut their costs, according to research by Hargreaves Lansdown.
However, while there are some ways to cut back that will work and help with financial pressures, there’s always the risk we’re tempted to make a cut that backfires. So it’s worth knowing some of the changes that can end up being a false economy.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says: “Right now it’s a great idea to cut back your spending wherever possible, but you need to consider really carefully where you make these cuts, because some changes could end up doing more harm than good – and can end up costing you more over time.”
7 FALSE ECONOMIES – THE TEMPTATION VERSUS THE RISK Credit card minimum payments
The temptation: You’re only required to make the minimum repayment on your credit card. This tends to be between 1% and 3% of your bill, or something between £5 and £25 – whichever is highest. During tough months it’s tempting just to stick to the minimum.
The risk: These minimums are designed so you carry your debts for decades – and in some cases forever – lining the pockets of the credit card company with interest payments. The longer the period over which you make the minimum payments, the more it will cost you in interest.
Plus, if you keep spending on the card you will hit your limit, and end up with spiralling debt and no access to credit.
Scrimping on home insurance
The temptation: You might think this is a cost too far, and not buy home or contents insurance, or underestimate the value of your property or its contents to keep premiums down.
The risk: There are £8m worth of domestic property insurance claims processed every day, so there’s a fair chance one day you’ll need to claim.
Water leaks are the most common types of claim (29%) followed by fire (17%), and while it’s possible to protect yourself with things like smoke alarms, it’s impossible to completely eliminate either risk. If you’re underinsured, your insurer may only pay a percentage of your claim. Say, you have contents worth £40,000 and you only have insurance for £20,000, they may only pay half of anything you need to claim – so you’ll end up having to spend thousands of pounds of your own money.
Car insurance fibs
The temptation: You might want to bend the truth for cheaper cover. One of the most common mistakes is a parent claiming they are insuring themselves with their offspring as a second named driver, but the youngster covers many more miles. You might also fib about what you use the car for, how far you drive in a year, or your occupation.
The risk: When you come to make a claim, all these things will be checked, and if you have lied, you may have invalidated your cover. If you have lied about the main driver, as in the example above, this is known as fronting, and is illegal.
It’s not difficult to find out who uses the car most, and you will either be expected to cover the difference as a lump sum or the policy will be void. If the policy is cancelled, the young person might be considered to have been driving without insurance, which can mean an automatic ban for new drivers.
Skipping a car service
The temptation: Servicing is never cheap, and there’s always the risk that something expensive will show up so you may be tempted to leave it longer between servicing in the hope anything major is picked up by the MoT test in the interim.
The risk: The MoT is about safety, whereas your car service is about maintenance. Without it you risk more breakdowns or accidents, a shortened lifespan for the car, and a lower resale value – because your car is worth more with a full service history.
If parts are worn down it can also affect your fuel economy, making the car more expensive to run.
Pausing life insurance
The temptation: It might feel like an easy one to ditch and you may be tempted to cancel cover, just for the short term.
The risk: If you have people who depend on you, then if something was to happen while the cover was cancelled, there would be no support in place for them. If you have a mortgage, they may be forced to sell up because they can’t make the repayments. Even if nothing happens while you’re without cover, when you start paying premiums again you’ll need a new policy, and because you’ll be older and may not be in such good health, they could cost more.
Only paying for the energy you use
The temptation: Only paying for the energy you use, and trimming back direct debits means you may be able to cut monthly payments in warmer weather and avoid building up credit with your provider, making it easier to make ends meet.
The risk: You will pay more because there’s a discount for direct debit payments. Although this economy will cut payments in warmer weather, direct debits are structured to build up a credit for more expensive months.
Without having something on your account ready to cover higher costs, there’s the risk of getting a nasty bill out of the blue during the winter.
Buying less data and minutes than you need on your mobile
The temptation: You can save on monthly contracts and sim-only deals by scaling down your package for less data and minutes.
The risk: If you bust your limits, the extra data can be expensive, so it’s worth checking your previous usage to see exactly how much you tend to use – so you pay for what you need, but no more.