What's Screwing Up Your Savings?

Although we Brits are saving harder, we also have a healthy appetite for borrowing. Is debt putting the brakes on your finances?

First, some good news: according to new research from IFA Promotion (IFAP; an organisation which promotes the benefits of independent financial advice), we Brits have made a serious effort to save and invest more in the past few months. Hurrah!

Second, some bad news: IFAP also warns that we can't get rid of our bad habits, because our appetite for borrowing money is undermining our efforts to save -- something which it calls the 'savings brake'. Oops!

Let's take a look at IFAP's latest research to get to the heart of this trend. By comparing non-homebuyer borrowing (credit cards, loans, overdrafts, plus mortgage equity withdrawal) to savings and investment contributions, we can see how the savings brake has varied over time:

Sources: ABI, AITC, Bank of England, BBA and IMA

* The savings brake shows how many pence we borrow for every £1 that we save or invest.

As you can see, in the first three months of 2006, we borrowed only 16p for every pound that we put aside, which is the lowest quarterly figure in the past 5½ years. However, in the second quarter of this year, our borrowing binge bounced back, with the savings brake tripling to 48p per pound. (I suspect that there is some seasonal explanation for the severity of this U-turn.) Still, this is far lower than the 83p savings brake recorded in 2003, which is some comfort.

What's more, on studying the past twenty-two quarters of data, I discovered that the savings brake has topped 100p on three occasions: Q3 2002 (102p), Q3 2003 (128p) and Q1 2004 (109p). In other words, during these three quarters, we borrowed more money than we saved/invested, which is nothing to be proud of!

Although I'm pleased that we saved a record £38.6 billion between April and June, I'm disappointed that British borrowers are still enjoying their destructive love affair with 'easy credit'. After all, Best Buy savings accounts pay around 5% a year before tax, compared to the 16%+ charged by most credit cards. Hence, it makes sense to brush up your budgeting, rein in your spending and pay off expensive debts before adding to your savings pot. These articles will help you to do just that:

• How To Budget;
• Ten Steps To Defeat Your Debts;
• Pay Off Your Mortgage In 1½ Years!; and
• Ten Tricks To Boost Your Savings.

More: Use the Fool to find great savings accounts, 0% credit cards and low-rate personal loans!