Stoptober is the annual campaign run by Public Health England to encourage people to give up smoking – starting in October
Over the five years the Stoptober campaign has been running, 1.5 million people have tried giving up. For those who are successful, huge savings await: with someone who smokes ten a day able to save £1,341 a year. However, there are also big savings to be made from tackling bad financial habits.
Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown:
“While hundreds of thousands of people battle to give up smoking this October, they are still carrying terrible financial habits that are just as expensive, and could cause serious damage to their financial health. This Stoptober is a great opportunity to stub out your worst financial habits.”
Bad financial habits to quit
1. Dipping into debt
More than one in ten people dip into their overdraft every single month, and one in four do so from time to time, according to ThinkMoney. You don’t have to go terribly overdrawn for particularly long for this to make a big dent in your finances.
If you were to go just £50 overdrawn for the last four days of every month, you would pay £73.20 a year. If you hadn’t arranged the overdraft, it would cost at least £384 a year. Meanwhile, if you went just £50 overdrawn for a fortnight each month, an unarranged overdraft could cost £960 a year.
Beat the habit
If you regularly dip into your overdraft, the answer lies in drawing up a household budget, and identifying the regular costs you can cut. This may mean shopping around on essential bills and groceries, or cutting out those things you don’t get much value from, such as gym membership or expensive media packages.
If you’re a repeat offender, you can consider setting up text alerts in online banking which will text you if you’re running the risk of going overdrawn.
2. Paying the minimums
The minimum payment required on your credit card can easily lull you into a false sense of security, as paying 1 per cent of the debt plus interest can make a substantial debt feel under control. Unfortunately, by paying the debt down at a snail’s pace, you’re racking up shocking interest charges. On a £3,000 debt, with an interest rate of 18 per cent, paying off 1 per cent of the balance plus interest each month would take more than 27 years to fully pay down, and cost almost £4,000 in interest.
Beat the habit
If you have expensive debts like credit cards, it’s essential to pay them off as quickly as possible. If you have a significant balance, it may be worth switching in order to cut interest payments in the interim. However, if you switch, it’s vital to see this purely as a mechanism for debt repayment. If you’re tempted to rack up more borrowing, you’ll end up in an even more expensive position.
3. Leaving savings languishing
According to an FCA study in 2015, some 80 per cent of easy access savings accounts hadn’t been switched in the previous three years. Neglecting savings is an expensive habit to fall into, because over time, the rates on these accounts are likely to have become less competitive – especially if a bonus was applied at the outset. A saver with £5,000 in an account paying 0.05 per cent would make just £12.52 in five years – compared to one switching to a 1 per cent account, who would make £256.25.
Beat the habit
Even in this era of low interest rates, it pays to make a date to regularly check what you are earning on your savings, and if the rate is no longer competitive, make a switch.
4. Not making the most of tax shelters
When we’ve done all the hard work of putting money aside for the future, it’s crazy to let the Treasury take a big chunk of any growth. However, plenty of people fall into this trap.
The interest and income tax advantages of ISAs, and pensions mean they’re a no brainer for people who are planning to hold stocks and shares. If, for example, you were to invest £20,000 in a stocks and shares ISA, after five years, the ISA could be worth £24,042 and you would have saved £354 of tax. If you put that £20,000 lump sum into a pension, meanwhile, a basic rate taxpayer earning £25,000 or more a year, would get an additional £5,000 top up from the government immediately.
The benefits of cash ISAs have been harder to appreciate since the tax-free savings allowance was introduced, especially as rates tend to be lower than on their equivalent savings accounts at the moment. However, there are still good reasons to consider a cash ISA in order to protect this year’s allowance.
Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown: “All it takes is for interest rates to rise, sums to build up in your accounts, you to move into a higher tax bracket or there to be a change in savings policy and you could end up paying tax again.”
Beat the habit
At the start of each tax year, it’s worth taking stock of your savings and investments, and asking yourself whether you really need to be paying tax on them.
The good news is that ISAs and pensions can be no more complicated to set up and contribute to than their non-tax-efficient equivalents
5. Putting things off
Long term goals like retirement may seem an awful long way off, but every day you save makes a big difference. It’s not just the years of contributions you will miss by putting things off, but the effect of compounding returns – which is jaw-dropping.
If you put £200 a month into a pension at the age of 20, you could build up a pot of £402,086 at retirement. Compare this to putting things off until you reach the age of 40, which would shrink your pot to £143,303. These figures show the power of compounding, because a 20-year-old will get more than four times the growth for investing for less than twice as long as a 40-year-old.
Beat the habit
There are always too many demands on your money, but it pays to invest as much as you can afford for retirement, as early as you can afford to do so, to take advantage of compound returns.
If you clean up your financial habits, give up smoking this October, and free up £200 a month, you could sort your long-term plans with no extra outlay.