Be honest with yourself and think about what type of spender you are.
You should look at your total savings and debt and check, because in the end, everything is yours!
Stop mental accounting and save big time!
Imagine you have RM10,000 on a savings account on which you receive 1% interest/profit, while you also have a credit card or personal loan debt of RM5,000 on which you have to pay 18%.
Obviously, it makes sense to use your savings and pay off the credit card debt as the difference between the two interest rates is a staggering 17%. You will be able to save RM5,000 x 17% = RM850 per year by paying off your credit card debt!
As another example, imagine you have RM20,000 on a savings account for your children’s education on which you receive 1% interest/profit, while you also have a long term deposit on which you can earn 4% interest/profit with RM50,000 for your retirement.
By transferring your savings of RM20,000 to the deposit account, you will increase your interest earned with 3% x RM 20,000 = RM 600 a year!
Who will benefit from mental accounting?
Of course, saving money by paying off your high-interest paying debt with money from your savings account only works if you know you will not be seduced by swiping your credit card again and again.
Once your credit card is free of debt, it should stay that way! If you rack up debt again, you will soon run out of savings!
If you know that you find it hard to limit your swipes and are applying to the bank for a personal loan every year, mental accounting may actually help you!
You have taught yourself that each stack of money has its own goal, and comes with its own restrictions and rules: you should not spend your retirement savings on a car or a holiday; your monthly costs (e.g. housing, groceries, transport, and clothing) should be smaller than your household salary.
These rules will help you to not frivolously spend money from your savings accounts and limit your spending to money that you can afford to spend.
Be honest with yourself and think about what type of spender you are.
Can you handle the responsibility and save money by looking at all your savings and debts and transferring money to the accounts with the highest return and lowest cost?
Or is your card red hot from all the swiping and do you benefit from having your savings in separate accounts, some of which you will never touch because they are strictly meant for important milestones in your life?
Mark Reijman is co-founder and managing director of CompareHero.my, dedicated to help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia.
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