This feature is part of our FREE weekly personal finance email, Money Sense, written by MoneyWeek editor Merryn Somerset Webb. If you’d like to receive Money Sense to your inbox every Monday, click here: sign up for FREE Money Sense email.
Welcome to the first edition of Money Sense, my new weekly email concentrating on personal finance.
As we see it one of the most important steps in the journey to wealth is getting your basic money management right. Mortgages and credit cards may not seem to be quite as interesting as Canadian gold mining stocks and arguing about when the US dollar might collapse but for many of us they may be more important.
What’s the point in spending hours agonising over whether you should have money in China or in India or over which UK fund manager might make you 1% more than another when you are paying 20% annual interest on your store card or getting a miserable interest rate on your savings account?
The first step to being free of money worries is to sort out and simplify your personal finances. To make sure that you have as little debt as possible and that you are paying as little interest as you can on that debt; that your current account serves your needs; that you are making a real return (after inflation) on your cash savings; that you aren’t loaded down with insurances you don’t need; that you aren’t paying too much tax and that your mortgage really suits your circumstances.
This really shouldn’t be hard. And it wouldn’t be if the financial services industry didn’t do its utmost to make it hard. Think of the money business in the same way you might think about the fashion business. We all have more than enough clothes. But fashion firms still have to make profits and the only way they can do so is to persuade us that we need more – in the fashion world they can’t just shut up shop because you already have ten dresses.
So every few months manufacturers change things. They produce new styles, new colours, new combinations and new materials. Then they spend millions advertising, marketing and sucking up to fashion journalists to get the details of their new ‘must-have’ look out there.
Financial services firms do exactly the same: they know our money needs are generally quite simple (a mortgage, a current account, a savings account or two and a pension) so to keep their profits growing they invent new products and spend millions persuading us we need them.
So once again we find ourselves paying too much for useless tat (insurances against things that really won’t ever happen, for example) only this time the consequences are worse: buying a pair of ‘ mini shorts’ because they looked nice on Sienna Miller might bring you short term embarrassment for example, paying too much on your debt could bring you long term financial hardship. The point of Money Sense is twofold. First to help you distinguishing between the products you really need and those the big banks want you to think you need. And second, to help you locate the best products among those that you do need.
I’ll start looking at all these things in more detail next week but in the meantime anyone who thinks that I’m being hard on the might take a look at the latest ad from Egg for their credit card (https://new.egg.com/visitor/0,,3_83200–View_1726,00.html). Egg explains the ads by saying that their products are so fantastic and so revolutionary “we had to test it on guinea pigs and our TV commercials show you the outcome.” The current ones follow groups of actors dressed up as guinea pigs (“trained and choreographed by an expert in animal movement to make them appear just like guinea pigs“) and shows how their “modern, easy lifestyles” are enhanced by Egg which offers them such a great deal they will never feel they have to switch cards again.
But I’m not sure there is anything remotely revolutionary about Egg’s card. The ads tell us that they offer 0% on balance transfers until November and 0% on anything you buy with card until August. Then (and this I think is the bit you are supposed to think is exciting) you get an ‘anniversary offer:’ next year and the year after in February you will get the opportunity to transfer even more debt on to the Egg card at 0%. This, says Egg, means it is a card “ you can stick with.”
Is it? We can immediately discount the 0% transfer and new purchase offers. You can get longer periods for both with several other cards (such as those from the Bank of Scotland). Egg also charges an APR of nearly 17% when the 0% periods are over. That’s much too high – you can get rates of less than 10% elsewhere. It also charges 2.5% of the value of any transfer you make, which must be a nice little earner for it. So what of the anniversary offer? Does that make the Egg card worth it? Well, if you aren’t the kind of person who consistently runs up credit card debt you can’t pay off clearly it isn’t. And if you are I’m afraid it is unlikely to do you much good either. By the time you transfer any more debt over your original transfer and new purchase debt will be attracting interest charges of 16.9% and when you transfer new debt in you will stop paying any of this off. Egg will bias all the payments you make to paying off the no interest debt leaving the high interest debt trapped and clocking up interest every day you can’t repay it until you’ve paid off all the cheap debt.
Do the sums and you may find you are better off keeping the whole lot on a nice simple card charging 9.9% (see www.moneyexpert.co.uk to find the best ones) and paying it down as fast as you can. The marketing men at Egg thinks you don’t care about anything except having a ‘modern easy’ life. They think you won’t read the small print and notice all the catches in its deals. And they think you are so easily amused that they can get away with comparing you to a guinea pig and still attract your custom. Wouldn’t it be nice to prove them wrong?