December 2017
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Avoid the 5 most common money mistakes: 1. Don’t save while owing money

The most common money mistake many people make, which makes them poorer while enriching the fortunate people in the finance industry, is probably the easiest to avoid. If we look at the various ways we can borrow or save money, it becomes obvious that we pay much more interest on money that we borrow on store cards, credit cards, overdrafts and home loans than we get in interest or growth on money we save in bank accounts, pensions, shares or unit trusts.

Millions of people are borrowing money at usurious rates – possibly over twenty per cent on store cards and at least sixteen per cent on credit cards while holding money in bank accounts earning probably less than one per cent. Some of these people may even be investing in a pension or the stock market where they will be lucky if they get three per cent a year after charges, yet they are paying four times that much on unpaid balances on store cards and credit cards. This is clearly complete madness.

The mistake of saving in bank accounts, pensions and shares at paltry rates of interest and growth while paying extraordinary rates on store and credit cards may only be made by a few people. A much more common error is where people paying off mortgages are also investing in shares, unit trusts and personal pensions. If you take out a twenty to twenty-five year mortgage for say £150,000, you’re going to end up paying somewhere around £300,000. If you have £10,000 in savings you might get £200 to £300 a year in a long-term bank deposit account, a pension or a unit trust. But you could save over £600 a year using this money to pay off your mortgage faster and earlier. For example, if you pay off an extra £2,000 a year in the first five years of your mortgage, you’d probably be able to reduce your payment time by about tour years and cut your repayment costs by about £20,000. That’s a much better return than you’ll get from most savings or investments, whatever your bank, financial adviser or unit trust salesperson claims about the often wildly exaggerated potential growth of whatever they’re keen to flog you.

As with any comments about where people should put their money, each individual should do their own calculations. But for hundreds of millions of people around the world, the strange lunacy of borrowing expensively while saving for paltry returns could easily be cured by the application of some elementary arithmetic and just a little common sense.

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