A hot topic at the moment is the fact that many adults are not able to carry out basic financial calculations and do not have the knowledge to understand everyday banking and financial matters. It is estimated that 49% of working-age individuals find the idea of managing their money daunting and have a numeracy level equal to that of today’s primary school age children.
It is thought that this is at the root of the PPI scandal – extra charges that were added to loans and credit cards were missed by those who could not calculate what the overall or monthly interest rate charges should be. Couple this with the fact that many of these companies were not forthcoming with the information in the first place and it is easy to see how the issue spiralled to the level it.
After much campaigning, the Government added finance to the National Curriculum but failed to support this with sufficient funding. Consequently it has not been properly implemented and therefore is unlikely to be effective.
To help you, here are some common terms and concepts you and your family might like to know:
If you have £1,000 in a savings account that pays 3% per year then in the first year you will earn £30. Assuming the £30 is left in the savings account, 3% on £1,030 will be £30.90. By the tenth year the interest would be £52.61 per year.
You are effectively earning interest on your interest.
Fees and costs
Make sure fees and costs are as clear as they can be and do not be mislead by what sounds like a good deal. Ensure that comparisons are like for like: if product 1 has a fixed fee and product 2 a percentage fee, convert the percentage fee to a fixed fee before comparing the products, or better still ask the providers to do this for you!
For example, you have £100,000 to invest in a savings account. Product 1 charges a flat rate of £100 per year, therefore the cost would be £100 per year. Product 2 charges 0.25% per year, therefore this would be £250 per year. Product 2 is therefore much more expensive than product 1.
ISAs & Pensions
There are many pros and cons with ISAs and pensions, however basically, if you don’t use your annual ISA allowance and annual pension allowance you are missing out on valuable tax-efficient benefits, (depending on your circumstances of course!).
Don’t get caught out when fixed-term deals come to an end. Most providers automatically transfer accounts to their standard tariffs, which are normally at least three times more expensive than the best deals, in the hope that either you won’t notice or you won’t have the time or inclination to do anything about it. This applies to energy suppliers, mobile phone tariffs, tv packages and mortgages.
Inflation must be taken into consideration when looking at your “real returns”. A 2% interest rate from the bank is all well and good, but if inflation is 3% per year then you are actually losing money at a rate of 1% per year – not so good.
Redwood Financial are always here to help and advise you. Book a meeting with one of our Advisors: Email: firstname.lastname@example.org or Tel: 01489 877 547