Saturday, 20 September 2014

Missing the "Not So" Obvious

We have a Halifax Online Saver account attached to our main current account which is paying an introductory interest rate of 1.25% for the first year. This rate will soon be coming to an end and we'll be back down to 0.25%. There's not a lot of cash in there as it just holds our pre-emergency fund - ie for when the current account needs topping up a bit if we have an expensive month. Therefore it's pretty key that this money is easily accessible and instantly transferable into the current account. Currently the balance is around £5,500.

I have been thinking about what to do with this cash now Halifax will be dropping the interest rate and I was considering opening another of the higher rate current/savings accounts (we already have a joint Santander 123) when it suddenly dawned on me that the answer was (seemingly) obvious.

Last year I took up a M&S current account and credit card. I shop there a lot and this has definitely been a good move as the points I have earned have gained me plenty of money off vouchers and special offers. I have also been able to take advantage of a 6% regular savings account which is limited to £250 a month for one year (interest paid at the end of the term). The M&S credit card is interest free for 18 months so I have been saving my £250 a month rather than paying it all off knowing that I will be able to do so when the savings account matures whilst gaining the interest along the way. ("Stoozing" the card as I believe it is called).

It then occurred to me that surely the best action would be to pay off the £2,300 credit card balance using some of the cash in the Halifax saver. On the surface this feels like it would be a good move - my basic "commonsense" tells me that this way I will be gaining 6% on the cash and I will come out better off than if I continue to save the money and pay off the card at the end of the year as I originally planned. But is this true? Is there really any benefit to be gained? Don't I get exactly the same benefit either way?

What this exercise has shown me is that although there are lots of cases where we do ignore the obvious in money matters - paying off mortgages when we would be better to keep the low rate of debt and use the money elsewhere, being tempted by BOGOF offers when we didn't even want the "one", putting money into very low rate cash ISAs when there are current accounts paying better interest rates, racking up credit card debt and putting money into low rate savings accounts at the same time, the list goes on and on - there are also cases where our intuition is well and truly fooled by the mechanics of finance.

I am reminded of those "Magic Eye" puzzles which were popular a few years ago where you had to train yourself to squint in order to be able to see what was hidden inside the pattern.

Despite the fact that numerical literacy is generally of a fairly high level in this country some of the basic rules of how money "works" are not obvious, although they are (of course) always logical. This seems to be the root of the problem. We may not struggle with simple numbers, and we can be taught the rules that help us deal with them fairly easily, but the laws of logic are a little trickier to formalise, grasp and apply to real life. We can end up going round in circles and not actually doing anything because the best route isn't actually all that clear. It's easier to just concentrate on one part of the picture at a time rather than try to see it as a whole, work out how the bits interact and act accordingly.

As far as my dilemma goes I'm pretty sure that I'm only going to earn my 6% on the 12 x £250 payments once, so it doesn't really matter which money I use to get it (does anyone disagree?). In any case I will still be left with the problem of finding some way of getting a little interest from what's left over without giving myself too much hassle as regards managing it. Back to the drawing board.

(By the way my ISA transfer has finally completed and I put in a sell order for around £10,000 worth of my CIS UK Growth fund yesterday - I'll be double checking my strategy for what to buy with the money this weekend against Tim Hales and Monevator - hope I can do it without having to squint - those Magic Eye puzzles always gave me headaches :-))


  1. I used to love those Magic Eye pictures!

    I see where you're coming from - there's a lot of financial confusion and at times, it's a bit of a maze. For the past couple of years, I've been regularly putting spare cash into my cash ISA which paid 1.5% interest tax free. It was the 'tax free' wording that deluded me into thinking that this was the best place for my cash. Since I've never been able to max my ISA allocation (and never will, with it being £15k now!), I should have realised that it doesn't really matter where I put my cash, as long as it's a decent interest rate.

    I discovered earlier this year that my bank does a one year saver (like your M&S one) only up to £300 per month, with interest of 6%. Apparently, they've been doing this a while and interest rates were even higher, yet I never even looked at or considered non-ISA savings accounts because I was distracted by all the noise that savings need to be 'sheltered' in ISAs. Sheltered from good interest rates, it seems like haha! So, I'm currently saving into this account instead of my ISA - I hope there's another one available next year.

    Anyway, I think you're right to be saving instead of paying the £250. Also hurray and congratulations on finally getting your ISA transferred (did I hear a champagne cork popping then hehe!) and hope you've had a chance to read Hale/Monevator this weekend!

    1. Good news on finding that one year saver :-) I'm hoping to set myself up with another one next year too, perhaps even if it does mean opening yet another bank account. Although I do think that sometimes the amount of time/work required to get a little extra interest just isn't worth the effort. As they say "Time is Money" :-)

  2. > It then occurred to me that surely the best action would be to pay off the £2,300 credit card balance using some of the cash in the Halifax saver.

    I think you actually lose out doing this, since as I read it the CC is interest free until some future point. You lose optionality - your cash buffer is higher until the CC is paid off at the end of term. True, that money doesn't earn any interest, but it still reduces your risk. Say the boiler blew up tomorrow - if you'd paid the CC today you might have to borrow the money, whereas by keeping your float high you could stave off borrowing to later.

    I've given up chasing lousy interest deals on cash. Sticking it in a SIPP and getting a 20% tax bung, amortised over two and a half years is good enough for me, but it's not an option that's attractive to anyone < 50 because of the long hold time.

    1. Thanks ermine - I hadn't thought of that side of things. Funnily enough I actually ended up putting £1000 of the money into my SIPP. I'm 55 and trying to get enough in there so that I'm able to leave work at 60 and defer taking my DB pension early. It's a bit of a fine balance though as I don't want to put so much in I end up paying tax when I take it out. There's a way to go before that's likely though. :-)