Forcing people to save is lunacy

Last week a press release made the thoroughly unsurprising revelation that many households, - 500,000 to be exact - could avoid debt problems if they had £1,000 in savings.

The shocking, and crazy, part was that the charity producing the research wants the government to force us all to save.

Did anyone really need debt charity StepChange to tell them that having money set aside stops you going into debt?

"Research shows that households with modest savings are less likely to fall into debt," says the release. Well, knock me down with a feather.

We all know that having an emergency savings pot is a good idea. It means when the boiler breaks, you ding the car or tiles come off the roof you can sort it out without having to panic.
%VIRTUAL-ArticleSidebar-deals%
Knowledge isn't power

But, knowing that savings are a good idea and actually having any are two very different things. Of the adult UK population, 13 million of us don't have enough money set aside to cover our essential bills for just one month.

If you have savings, make sure you're earning a top rate

There is undoubtedly a personal debt problem in this country. Rather than save, many of us live hand to mouth and rely on credit cards, personal loans and payday loans if we need fast cash.

On average we owe £6,359 per household, according to statistics from TheMoneyCharity.org.uk, with £2,303 of that on credit cards.

So, getting the nation to save a little more is important. But StepChange's solution to the problem is misplaced. The charity has suggested that the government should force people to save by introducing an auto-enrolment scheme for rainy day savings similar to the system in place for pension saving. So, unless you opted out, part of your salary would automatically be withheld from you and put in a savings account instead.

Compare savings with AOL Money

It is a ridiculous suggestion that throws up a whole host of problems. Would the person have a say over what savings account the money went into? How easily could they access the money? Would they have to prove their need was a genuine emergency before they could access their own money?

Possible side effects

Also, if it is an automatic enrolment people could possibly be unaware this money is being set aside for them and end up in even worse financial problems as they have a smaller income and still turn to debt in a crisis.

There is no guarantee that setting up a costly auto-enrolment scheme for savings would make any difference to the nation's reliance on credit.

A far better idea is to build upon existing ideas that encourage people to save. Millions of us have Individual Savings Accounts (ISAs) and use these to set aside cash that can grow without the taxman taking anything away. This is a good start and the simplification of ISAs last year was a brilliant move.

Low savings rates

The problem that remains though is that pitiful interest rates make saving pointless. At present the best rate you can get on an instant-access cash ISA – the type you need for emergency savings that you might need in a hurry – is 1.5%. With inflation currently sitting at 2% RPI that means your money is shrinking.

Put £1,000 in that account and in 12 months time you'll have £1,015 but you would need £1,020 to have the same spending power as your £1,000 had a year ago.

That's why many people aren't saving. To increase the number of us tucking money away for a rainy day two things need to happen. Firstly, interest rates must rise so saving appears rewarding again. Secondly, financial education needs to improve so people better understand just how expensive relying on credit to get by can be.

The one thing we definitely don't need is the government to step in and start forcing us to save.

Read more on AOL Money

15 ways to save £5,000 in 2015

10 Great vouchers for a cash-strapped January

Compare savings