SMUG MONEY: With this switching system, the house always wins

Written by Rebecca O'Connor on 16th February 2016

Does all money advice boil down to the same thing? Shop around and switch? Is that it?

There comes a point, after you have switched your energy provider three times, your current account twice, your ISA yearly, your mortgage every two years and each of your four main insurance policies every year that you might start to feel a little bit like a you are not actually winning, after all. You thought you were playing the system. So why does it feel now, like the system is playing you?

The way we interact with money has come along way, thanks in no small part to the invention of the price comparison site and the wonderful Martin Lewis. As a nation, we are much wiser and more confident in the face of the country’s biggest financial institutions. Those of us that have been very diligent have probably saved thousands of pounds through not sticking with the same poor value deals year after year.

A money history lesson

To fully appreciate how far we have come, you have to remember how things were 20 years ago. 20 years ago, price comparison sites were not a part of everyone’s lives. 20 years ago, Martin Lewis’s Moneysavingexpert.com was a glint in his canny eye (if that!). Most people had an account with a big four bank, an energy tariff from a big six energy provider, paid the licence fee, had a mobile phone but not definitely home broadband and did not have half a dozen random little subscriptions paid via Paypal. Insurance was less esoteric – you had a broker, probably, and the basic necessary policies. A mortgage was something you had just once and you just kept it, even if the rate rose a bit.

And thank the bejesus out of everything, things are not like that any more. Because we were being screwed over massively.

The thing is, we still are. True, there are ways to play the system, and Martin Lewis knows every single one of them – thanks to him, many of us are being screwed over much less. But the big financial institutions make money out of customers for a living. The rest of us have other things to do with ourselves (like work, look after children, etc.), which get in the way of always being on top of our finances and always being on the best deal for everything. And believe me, I feel so guilty that I am not, despite being a money blogger.

House always wins

Many of us cannot make a full time job out of switching everything, which it sometimes feels is what is required. I have to put a morning aside every 12 months to look for a new car insurance policy, two days for a new mortgage search and application, one day to compare the best phone and broadband deals. And so because of a lack of time (not a lack of commitment to the cause), I know for sure that I do still end up overpaying for things. For example, I spent three years paying £65 a month for life and income protection when I didn’t need to, because I had given up smoking a year before that and I was still being charged smoker premiums and had totally forgotten this. When I got round to switching, they came down to £35 a month. I had, in other words, wasted nearly £1,000 over 3 years on unnecessary insurance premiums. In that time, I’d saved on energy, car insurance and a mortgage deal. But I had forgotten about this chuffing insurance premium. Gutted doesn’t cover it.

So, we set ourselves a tall order in trying to keep on top of all the switching. And because life gets in the way, and providers PLAY US FOR A LIVING, the house, it seems, always wins.

Time is money

It doesn’t matter how often we hear the message: “shop around and switch, shop around and switch”. We know what we have to do. We’ve heard it a million times. And why again don’t we do it right 100% of the time? Life gets in the way, yes, and sometimes, even when it doesn’t, it doesn’t work out in our favour. Because, for example, somewhere, there is a b*****d clause in the terms and conditions we didn’t even notice (yes, it’s our fault, always our fault), that ends up costing you £300 without you even realising, and the hassle of trying to get it back is too much to bear and probably too time-consuming.

In this constant switch-a-thon, who is costing their own time? Based on the to-do list above, that’s about 5 days a year of time (which could be spent earning money if you are self-employed), spent purely on switching to find better deals. Say you could earn roughly £200 a day for whatever you do. That’s £1,000 of earnings right there that you have sacrificed in order to save sometimes much less on this or that most competitive deal.

Out of the frying pan and into fire

And very often, it is out of the frying pan and into the fire when you do switch, right? Not always, some providers do offer long term good value and service, understanding the benefits of loyalty rather than treating customers like damp cloths constantly to be rung dry. But how do you know til you’ve switched whether you have just got into bed with another devil, or you have found the one you want to marry?

Expansion bias

The system is still playing us more than we can possibly play it. We are a player but we don’t roll the dice. There’s a thing in behavioural economics called “expansion bias”. It refers to the phenomenon whereby companies, markets and economies prefer to make money through growth rather than through consolidation – there is an expansion bias in our psychologies that influences our perception of, for example, how money is made or saved and this is to favour the creation of new opportunities rather than by paring down and simplifying the options that are out there. You’d feel a bit short-changed by a price comparison site with just 3 options, right? But do we need to see all 132? In other words, our little brains tend to think: the more, the better. Instead, we need to allow in the way we manage our personal finances that sometimes, the less can be better, too.

Boring is sometimes better

How?

I am going to say something controversial now. Next time you switch, don’t just switch to the cheapest, switch to the best value with the best values. Being boring but good sometimes pays. Nationwide has sometimes tried to sell itself on being good value, long term. It is something that many building societies pride themselves on. And their customers do get it. But it can be hard, if you are a savvy shopper, to sacrifice the very cheapest deal for one that might cost a little more in the short term but will reward you if you stick around for the long term, and will save you that damned awful hassle of switching every single year of your life forever.

And when it comes to switching time again, do yourself a favour. Always think: do I REALLY need to switch? How much will it save me? Is that amount even worth opening the laptop? How much time will it take and is that time worth it? How much better is the product once the switching incentive has vanished?

We’re not saying don’t periodically review whether you are on the best deal for you. But maybe be a bit more holistic about it. And by that I mean – what is BEST? In every way – not just price, but long term good value.

Find the best values-based energy deals

Find the best values-based current accounts

Find the best values-based investments

Find the best values-based savings

… And save yourself the hassle of constant switching.