Investors could earn the equivalent of 8 per cent interest by paying off their household debts before putting money in an Isa, saving themselves a total of £3. 5 billion a year, according to a study by ING Bank.
Investing these savings at the average Isa interest rate could earn you £92. Using them to pay off your debt, charged at the average interest rate for unsecured household debt of 8.06 per cent, could save you £322. Some interest rates for UK credit cards are now approaching 30 per cent, meaning the money saved from paying off debts could be even higher.
In this light, letting your money sit in an ISA seems illogical. So why do we do it? Ian Bright, senior economist at ING, said: “People would be falling over themselves to open an 8 per cent Isa, yet millions of us could ‘earn’ an equivalent amount by using our savings to wipe our debts, thereby avoiding expensive interest payments.
“However, people will often be reluctant to do this because, psychologically, money saved may feel more valuable because it has taken more effort to accumulate, where debt is often accrued more easily.”
We interpret earning interest as a gain, and paying off debts merely as a minimisation of a loss and the former seems far more appealing.
ING’s findings show that this is costing British savers £9.4 million a day in unnecessary interest. It would appear that saving your money is not always the best way to save money.