'Jekyll and Hyde' savings disorder exposed

More than 12.2 million 'Dr. Jekylls' are sleep walking into financial disaster by refusing to redirect savings to service debt thanks to their 'Mr. Hyde' instincts to fund a lifestyle on credit.

10 May 2006

Posted in Innovation

This is the conclusion of the second quarter report from AXA Avenue, the UK's first financial social experiment. The report reveals that millions are facing a dilemma based on pressures to fund their 'buy-now-pay-later' habits on ‘cheap’ credit, at the same time as feeling compelled to save a proportion of their income in case of emergency.

More than one in four adults are ploughing around £2 billion into savings accounts every month while overlooking the £57 billion they owe in unsecured debt.

On average, those people who are suffering from the cost of saving whilst in debt are servicing £7,622 of debt whilst putting away an average £221.14 every month. However, those in the 25 - 34 year old category are worst affected by this 'Jekyll & Hyde' type disorder. They each owe over £9,000 whilst putting away more than £300 each month. The results have also found that men are making much greater monthly savings than women, despite owing a similar amount.

Debt: Average Amount Owed Debt: Average monthly interest repayment Savings: Average amount set aside per month Savings: Average monthly interest accrued
25 - 34 year olds £9345.2 £87.94 £307.01 £16.82
35 - 44 year olds £8905.8 £83.81 £198.70 £10.89
45 - 54 year olds £6603.0 £62.14 £212.01 £11.62
55+ £4195.7 £39.48 £122.35 £6.70
North £8069.2 £75.93 £212.01 £11.62
Midlands £6228.0 £58.61 £203.37 £11.14
South £8054.0 £75.79 £241.92 £13.26
Male £7448.8 £70.09 £266.91 £14.63
Female £7836.5 £73.74 £168.13 £9.21
Average person £7622.0 £71.72 £221.14 £12.12

On average, for every £1 of interest earned on short term savings, these ‘saver debtors’ are paying around £5 on the interest accrued on their debts. Women are most at risk, paying around £8 of interest accrued on debts for every £1 they earn on their savings.

The annual value of the interest this group earns on the £23.97 billion they have in savings accounts, ISAs, investment bonds and endowments is £1.21 billion. This pales into insignificance when compared to the group's annual interest repayment bill of £6.51 billion on its £57.65 billion of unsecured debt 2 . By re-directing their savings for just two and a half years, this group could clear their debts entirely.

So why do people save if they are in debt? 58% are saving for a rainy day while 32% are saving for a holiday. 37% feel compelled to save for the short-term ahead of servicing their debts because they feel more secure with savings (4.25m people), whilst 25% of people save out of habit, and a further 25% say they have been brought up to save.

Saran Allott-Davey, AXA Avenue's resident independent financial adviser, has been advising 10 households in Brighton since November 2004. By careful budgeting and consolidation of existing debts Saran was able to reduce the group's debt by more than £12,000 in just 12 weeks, and after six months this figure has increased to over £31,000. Only once their debts were under control did she feel able to turn her attentions towards helping the participants plan to make savings for the short to mid-term.

It is great that such a proportion of the population, more than 50%, are saving on a regular basis. The message that we must all take responsibility for our financial security is certainly getting through. My concern however is that some people are saving indiscriminately.

Those people who are saving money over and above clearing debts are paying unnecessarily high charges instead of redirecting savings for the short-term to be debt free. Our attitudes to debt and saving seem to be at odds with one another; on the one hand we feel compelled to save as it makes us feel more secure, yet we are comfortable with increasing levels of unsecured debt because it is regarded as ‘the norm”. I have been working with the AXA Avenue participants to stress the importance of achieving a balance between debts and saving and have been delighted with the results.

Saran Allott-Davey, Resident Independent Financial Adviser at AXA Avenue

Over the past 6 months Saran has really helped us to take control of our debts. One of my early concerns was that we had no short-term savings. She made it clear that saving was very important but only once we had reorganised our debts and taken control of our situation. I am now able to put money aside every month whilst making repayments on my existing debt which has been reorganised into low interest arrangements. The help Saran has given us to plan our finances has been wonderful; it's been amazing to see our debt drop month on month and now we are really starting to make plans to save for a deposit on a house.

Laura Stevenson, AXA Avenue participant

The results from the second quarter analysis of our financial social experiment inBrightonhave highlighted an interesting issue that hasn't yet been given a great deal of attention. We all know that it is right to save, but when is it right to save? With AXA Avenue we are dedicated to helping people better manage and understand their finances. We hope this latest research will facilitate a debate around savings to emphasise the importance of planning and careful financial management.

Steve Folkard at AXA