Welcome to our series on understanding money. We hope this will help you make some headway into understanding, and getting a hold of your financial matters. This is written from the UK perspective, but we welcome comments, comparisons, and questions from any country! It’s always good to know how money works on an everyday basis for different people around the world.
Money in Everyday Life
Thank you to Weenie at Quietly Saving who helped us out with this article.
Money in everyday life is all about the way we handle our money, day in, day out. Every day, we might use several different types of payment to purchase our general goods and services. We might use cash to buy groceries at the market, debit cards in the post office, and credit cards at the supermarket. We might pay our electricity bill via a direct debit, and have a regular standing order set up to pay into a savings account. We see things like BACS, CHAPS, and FasterPayments in literature from banks, or in our online banking, but do we actually know what each of these mean? What are the practical implications for using different types of payments? Is it easier or better to just use cash or cheques for everything? Or should we go with the flow and move as much as possible to a cashless society? If we went cashless in everyday life, what would the implications of that be on our everyday relationship to money?
Is it Better to Use Cash or Cheques?
The UK is indeed moving rapidly moving towards a cashless society. I personally do not carry cash very often, mostly because I feel like if it is in my purse, I will make excuses to spend it. I also find it a lot more difficult to keep track of cash payments, especially as you may often not get a receipt for them (e.g. you bought some carrots at the market). I am not against cash, and in terms of understanding money, the physical presence of cash in your hand is possibly the best way to learn as a child. But I know what I’m like, so I try not to carry it.
However, I do have huge reservations for a completely cashless society – potential for greater fraud or hacking, and the disconnect of the physical material of cash might make it seem less ‘real’, which could potentially lead to the increase of debts. However, I do know a lot of people who still use cash for everyday goods and services, because (completely opposite to me) they find it easier to manage their money using cash. If they know they only have £30 in their purse, they want to try and hold onto it as much as possible, so they delay or avoid making purchases. I just think whatever helps you to not waste your money is a good thing.
Cheques. Um, does anyone in the UK still use cheques? I can’t remember the last time I used one, and I have no idea why people would try to use them nowadays. However, I decided to research this, as I do still see things where they could be useful, such as in paying for mail order items. It turns out that lots of people still use cheques:
“nearly £840 billion of cheques were processed in 2012 – accounting for 10% of all payments made by individuals”
I was quite surprised by this, but it came from official government figures, so I think it’s probably quite accurate. According to the same article, cheque recognition technology is coming to the UK, so perhaps cheques are here to stay for a while.
Bank accounts are not as simple as they once were, when all you had in the past was a current account and a maybe savings account. Bank accounts now come in a few different flavours:
- basic bank account – everyone in the UK is entitled to at least have this simple, everyday account, even if they’ve been made bankrupt, or they’ve recently immigrated. They are free to operate.
- current account – an everyday account that most people have. You will usually be credit-checked to get a regular current account. They are usually free to operate.
- special current account – like a current account, but often with a small, monthly fee. These special accounts have some kind of benefits such as free travel insurance, a higher rate of interest, or cashback. An example of this is the Santander 123 account, which costs £2 per month, but has tiered interest rates and cashback on everyday bills, meaning that you should more than cover the £2 fee just by doing your everyday spending.
- premier current account – these are usually for high net worth (HNW) individuals. They often have eligibility criteria such as needing to be earning £100k+ per year AND having £50k+ worth of savings with the same bank. You often get extras such as a concierge service or worldwide travel insurance. Some premier accounts have a dedicated relationship manager, someone who you can always talk to, instead of talking to different people every time you call the bank.
Bank Transfers – What’s the Difference Between BACS, CHAPS, and FasterPayments?
You may have seen these different terms in your statement, or when doing your banking online. Here they are in a nutshell:
- BACS – payments made between banks. They usually take 3-4 days and a re used for things like Direct Debits
- CHAPS – these payments arrive the same working day in the other bank account
- FasterPayments – these are supposed to be same day, although from personal experience it is almost instant between banks that support the system.
What About Standing Orders and Direct Debits?
These are electronic payments from your bank account to someone else’s. The basic difference is that although you can set up a Standing Order or a Direct Debit yourself, with a Standing Order – you send the money to the other bank, whereas with a Direct Debit, the other bank takes the money from your bank. This is an important difference, especially with regard to bills and suchlike; due to this difference, Direct Debits are also covered by a kind of guarantee, so if they’re taken incorrectly, your bank can get the money back for you. Yippee!
Credit Cards and Debit Cards
In our society, we have grown used to using cards instead of cash, even at the pub! But if we want to be good at understanding money, we need to know how to answer the following question: ‘what are the differences between various cards’?
- cash card – this is a card you can use to take cash out of a cashpoint (ATM)
- debit card – this card lets you pay for transactions and takes the money out of your current account in 1 to 3 days
- credit card – this is a like a debt or a loan. if you spend on this card, you will owe the money to the credit card company and you will have to pay it back, usually within 56 days. A credit card may also offer cashback or airmiles as a reward for using it.
- store card – this is a credit card branded by a particular shop, e.g. Tesco Credit Card. They may offer some special features such as vouchers for the shop once per month.
We often hear about people getting into trouble with credit cards, racking up £1000s owed to the credit card companies. I find this really sad, but I totally understand how it happens. I had balances left on my credit cards when I first got them, because I didn’t really understand how they worked. I think they lulled me into a false sense of security, because it felt like I had ‘extra’ money to spend, whereas of course, I didn’t. I soon learnt that I did NOT have lots of extra free money to spend, so I quickly paid off everything as soon as I could. I then had only 0% or reward credit cards, so in effect I was paid to use them.
Credit cards can be pretty dangerous if you are undisciplined with money. If you’re not very disciplined, then it’s best to not use them. If you’re not too bad with money, you could just keep a credit card in a drawer at home for an emergency, such as your fridge breaking down. You can then buy a replacement fridge on the credit card, and pay it back from your emergency fund savings.
Apart from keeping a credit card for large emergencies, there are two other great reasons to have a credit card:
- Payment protection if you spend over £100 – If you spend £100 or more on a single item (or you put a deposit of £100+ on something expensive), you are protected under Section 75 of the Consumer Credit Act. Even if you paid cash but put just £100 of it on a credit card towards a £20k new kitchen and the company went bust, the credit card company would have to pay you back the full amount.
- Rewards/Airmiles – many cards offer significant rewards, often airmiles. You can get cashback, Tesco vouchers, Nectar points, and all sorts of things. Again, it’s only worth it if you are disciplined with money.
What do you love/hate about everyday money? Is there something else that puzzles you, that we haven’t mentioned? Let us know! Leave a comment below, we welcome your feedback!
photo credit: blplanet/freedigitalphotos.net