Smart Energy share tips for reducing energy bills
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Energy bills have increased to on average £2,500 a year, from the start of October, and this figure may be more for larger households. High prices for everyday essentials including food and fuel are also putting huge pressure on people’s budgets.
Laura Howard, personal finance expert at Forbes Advisor, urged Britons to plan ahead their finances and to avoid borrowing if at all possible.
She told Express.co.uk: “Borrowing to pay for essentials on a credit card should be avoided at all costs. For example, even on a card with a zero percent promotional period, interest will eventually kick in.
“And according to the Bank of England’s latest figures, the average APR on interest-bearing credit cards increased to 18.96 percent in September, which compares to 17.86 percent In December 2021.
“Unless you have an interest-free overdraft up to a certain limit, this form of borrowing is climbing too. Rates on interest-charging overdrafts in September increased to 20.83 percent, from 20.46 percent in August, according to the Bank of England.
“In other words, dipping into even the highest-paying savings accounts to meet the cost of bills will be more cost-effective overall than relying on expensive borrowing which can soon spiral out of control – and perhaps, for many, this is the very ‘rainy day’ that savings have been put aside for.
“It’s also worth remembering that, while returns on savings are rising, so is inflation – which currently stands at 10.1 percent.
“According to Moneyfacts, there is currently not a single savings deal that outpaces inflation – which could rise further before it drops.”
The Bank of England has increased the base interest rate to three percent, meaning a better return on many savings.
Ms Howard said this will make it all the more frustrating for people who are forced to use their savings to make ends meet.
She said: “Having spent the last decade or so hovering at little more than nothing, savings rates have shot up this year in the face of rising interest rates.
“With the Bank rate hiked up to three percent last week, the top easy access savings accounts are now paying up to 2.80 percent AER, while savers willing to lock up their cash for at least two years can access returns of 5.00 percent AER or higher.
“With rates rising, having to dip into your savings can feel particularly galling – especially if it’s just to meet the rising costs of essentials such as food, energy and fuel. But whether it’s a good idea to use savings depends on your alternative.”
Victor Trokoudes, co-founder and CEO at smart money app Plum, encouraged Britons to use their savings to pay off any debts.
He said: “When picking your savings account, make sure that it is FSCS protected and that the interest rate compounds so you get the full benefit from rising rates.
“When it comes to dipping into those savings, it depends on what they are being dipped into for.
“It is worth paying off any outstanding debt with savings, for example, if the interest rate on the debt is higher than the interest rate on the savings.
“There is certainly no benefit in getting into more debt due to not wanting to spend savings.”
He warned more people face the risk of going into debt as high prices for everyday essentials outpace household incomes.
He said: “It’s a higher risk for people who do not have an emergency fund saved, as these people are more likely to be tipped into debt by unexpected high costs.
“It is unfortunately a vicious cycle, because debt will be harder to pay off thanks to sky-high interest rates.
“If you are worried about dealing with rising prices you could try to save a little extra now into your emergency fund to avoid the risk of debt.
“Making a budget will help you work out where you could be making those extra savings.”
He said it’s a good idea to have emergency funds in an easy access account separate from long-term savings and investments.
Mr Trokoudes said: “Those who are worried about the winter months could stash extra away there beforehand rather than putting it somewhere less accessible.
“The good news is that interest rates on easy access accounts are increasing in response to the base rate, so you should be able to earn decent interest while keeping your cash close to hand for when you need it.”
He explained the different ways a person can structure their savings: “You could put all your savings into a five-year fix to get the highest rate, but then you could soon find that rates are higher elsewhere and your money is locked up with high exit fees.
“A way to navigate this is to spread your investment over different terms, say between one, two and three years.
“That means rates do rise after one year, you can move some of your money into savings accounts with higher interest.”
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