FOOL'S EYE VIEW
Three Simple Ways To Improve Your Finances

By James Carlisle
December 2, 2002

We're all keen to take advantage of a bargain in the shops, but when it comes to big financial decisions, we tend to bury our heads in the sand and forget all about it. It can be an expensive mistake. Here are three simple ways to brush up your finances.

1. Change Your Bank Account

It is said that people are more likely to change their spouse than their bank account, so what is it that makes us so in love with our bank? Not a lot really, it's just that it can be a bit of a pain to switch and it's hard to see that it makes much of a difference. After all, they all have cheque books, standing orders, cash point cards and all the rest of it.

If you dig a little deeper, though, then you can find some seriously tangible benefits from a better bank account. Some Internet-based current accounts, and those linked to mortgages via an 'offset mortgage', will pay interest of close to the base rate of 4% per year. So what's the average balance in your account? If it's around £2,000, then you could be better off by up to about £80 per year by switching.

You probably get a bigger effect if you're habitually overdrawn. A current account linked to your mortgage might charge only a little more than the 4% base rate, while a typical overdraft might cost more like 10% per year – potentially saving you around £100 per year on a £2,000 overdraft.

2. Change Your Mortgage

There are potentially bigger gains to be made from changing your mortgage. Mortgage providers know how short-sighted and lazy we punters tend to be, so they'll typically off a low rate of interest to entice you, just to replace it with an uncompetitive rate later on.

If your mortgage has been running for a few years, then you could easily find that you're paying a per cent or so more than you might pay if you switched. One per cent doesn't sound like much, but when you apply it to a £100,000 mortgage then you get £1,000 per year, or a nice summer holiday.

With mortgages there can be a slight fly in the ointment. Having given you an attractive interest rate to start off, the bank doesn't want to see you leave just when they're about to make some money off you. So you may find that you're tied in for a few years and liable to suffer a 'redemption penalty' if you move elsewhere. But these penalties will expire, so it's well worth checking to see exactly where you stand. For more on this, have a look at the 60-Second Guide To Re-mortgaging in the Fool School.

3. Change Your Pension

Research from the Financial Services Authority suggests that while about 2% of people change their bank accounts each year and about 10% change mortgages, just 1% of people with personal pensions change to a new provider each year. The problem is that switching mortgages, and even bank accounts, can give you an immediate tangible benefit. With a pension, the benefit comes later on, when you retire, and it's a bit harder to spot. If you do a few sums, though, then you find that switching pension has perhaps the biggest benefit of all.

By charging maybe 1% per year less than a typical personal pension, one of the new 'stakeholder pensions' would have an annual return expectation of 1% per year more. So let's do some sums. We'll assume that you're paying £200 per month into the pension (including any tax rebates that the Government adds) and that you do so for 40 years (well done!). We'll also say that the stock market should grow at a conservative(ish) 8% per year for that period and that our 'typical pension' therefore grows at 6% per year (knocking off its 2% annual charges) and that the stakeholder pension grows at 7% per year (knocking off its 1% annual charges).

Playing around with the Motley Fool's compound interest calculators, we see that the typical pension would grow to about £383,000, while the stakeholder pension, growing by 'just' 1% per year more, should grow to about £497,000. That would give the stakeholder pension a tax-free lump sum on retirement of £124,000, compared to £96,000, and a pre-tax retirement income of maybe £26,000 per year, compared to £20,000 per year (based on current annuity rates and a 65 year old female). The difference can add up to a lot of Saga holidays.

As with mortgages, you have to watch out for penalties for leaving a pension early, but it may still be well worth it. There's more about checking your pension here.

Don't be a lazy fool!

The moral of all this, of course, is that there can be serious money to be gained by keeping on top of your finances. So go ahead and check that they're doing what you need them to, now!

More: The Fool's Banking Centre; Mortgage Centre; Pension Centre