Switching to a cheaper deal is always a smart move. But what you do with that 'saved' money is more important.
Have you used a comparison website and swapped to a cheaper deal, whether on your gas, electricity or even broadband? If you have you’ve saved money – well done.
But did you actually end up saving the money? Was it squirrelled away in the bank or did you end up spending it? Wouldn’t it be better if you used the money you saved to help yourself in the future?
Boffins in America have found what we believed anyway – that a lot of us don’t understand the difference between 33% off and 33% extra free. We end up spending more money by thinking that the ‘extra free’ is better. It’s something for nothing, but it is not as good value, and tends to be a more short-term reward.
(To check, we asked our Facebook followers to see if they understood the difference, and to a person, they got the right answer – 50% off is better. Our followers are obviously very intelligent…)
More seriously, while we ‘save’ money by using the likes of comparison websites, the money isn’t actually saved until it’s safely banked. Until then the temptation is there for it to be spent.
Save £20 on the gas
Say you reduce your gas bill from £100 a month to £80 a month by switching providers. That’s great; at the point your first bill is paid, you’ve got £20 that would have otherwise gone to an energy company. You now have two choices: spend the £20 on something else, or use the £20 to increase your savings pot.
If you spend it on something else you’ve in essence got a bit more for your money, by getting extra free. If you reduce your debt or increase your savings - while it doesn’t feel as good - you’ve got money off. In this example it’s the difference between 25% extra free (in the form of a “free” gift), and 20% off.
Saving, especially for a rainy day, is very difficult to do. However this could be a shortcut to it, and one that’ll keep you from ever having to contact us.
Saving money to avoid debt
As CCCS has said on many occasions, to prevent falling into debt, we should aim to have at least three to six months’ savings set aside as a cushion against an unexpected event.
So if you followed our advice, how much would you need and how are you going to get it? It’s difficult to imagine how you would find all of the money in one go, but break it down and there’s a way to reduce your outgoings to find an on-going percentage of the rainy day fund without it hitting your finances at all.
So how do you accrue this ‘money off’ to help you avoid debt?
- Firstly, that old chestnut: establish your current financial situation and do a budget. Once you understand your financial health you can plan more
- Use sites like lovemoney.com to compare deals and switch to the lowest tariffs that suit your situation – be realistic on energy use, the number of minutes and texts you use on your mobile, etc
- Once you’ve swapped, set up a standing order to squirrel away the difference between the old and new amounts on the first day you pay the new providers, and on every subsequent due date
- Find a decent Cash ISA or saving accounts, and put that money away into somewhere that’ll gain you a good interest rate
- Keep checking for better deals, especially once you’re out of the contract period. And if you change providers again, change the amount you’re paying into savings to reflect the updated difference.
While this lump sum only accrues more gradually, you’re using your ‘money off’ and also insuring yourself against future income shocks as a by-product.
Don’t be tempted to get extra free; be wise, get money off and then save it. It’ll help you from ever having to call us for debt advice.
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