Thursday, 29 March 2007

what does being rich mean?

Some days, I look back and wonder what exactly I'm saving and investing for. I don't have any great goals. I don't have any (or any desire for any) children to put through college. I have the money already for my first house and if my circumstances didn't alter, I'd never need to move. I enjoy travelling and have a list of places a mile long that I want to go and see, but I can afford to make a dent in that list right now because I like to travel cheaply. I enjoy my job, and its not something that I could do as well if I worked for myself. The plan for my estate (when I get round to making a will) is to leave money to charity, I don't need to end up with a great big pile of money just to do that with if I can donate whilst I'm alive instead.

So I was thinking, would I like to work really hard now so that I could be rich in the future? My inital answer, because I'm lazy, is no, I do not want to work really hard so that I can sit on a great big pile of money. But then I though about what I mean by being rich, and I decided that I mean the ability to not work for a living.

It then dawned on me that not only do I want to be rich at some point, I'm actually working towards it already. And thats because, I like everyone I know, do not plan to work until I drop dead. I don't want to be too old and sick to work, but with no money. I want eventually, to stop working and live off the money I have. I want to be retired, and being retired is being rich, by my own definition.

I have to work hard now, and save and invest money, because there is no where else that the money will come from. But I also have to have fun now, because its forty years until my retirement, and I don't want to put off all my fun until then. I'd better book another trip abroad.

plonkeesround march 2007

I will share with you the best* posts written this month

*by best I mean favourite and written by plonkee

pfblogsround 29th March 2007

This week I have mostly been reading the following personal finance blogs:

Wednesday, 28 March 2007

money scripts: voting (part 1)

In common with a lot of people, I’ve grown up with some scripts relating to money. By this I mean things that I have absorbed in childhood that I have never questioned. Some of those are related to voting.

first voting script
As a child, the importance of voting was drummed into my head. Interestingly, not because that’s how to get your voice heard, but because men and women died trying to get universal suffrage in Britain. Now, that’s all well and good, but how is it related to personal finance?

Well, in order to vote in the United Kingdom, you have to be on the Electoral Register. The electoral register is also used by credit reference agencies to confirm your address and not being on it damages your credit score. So there we go, registering to vote will improve your credit score.

Tuesday, 27 March 2007

not a money script: investing

Various members of my family have taught me lots of things about finance, mostly spontaneously or by osmosis, which I have since internalised as a set of scripts about money that I follow by default. Nearly all the money scripts that I have are useful and work well (although it never hurts to revisit their logic).

One of the things that my family didn't teach me about was investing. I am under the impression, rightly or wrongly, that they just don't know that much about it. To be fair, when my parents started work they had final salary pension schemes, and I'm sure they would have assumed that I would get one too. Also, if asked, I'm pretty certain that they would say that saving for retirement is a good thing. But that only goes so far, especially when you are confronted with a list of investment funds for your money purchase pension from which you have to choose when you start your first job.

If I ever have the opportunity to influence young minds (heaven forbid) on the subject of finance, then I'll be sure to plug investments. I'd tell them about index funds (I understand them) and also explain about tax advantages and the power of compound returns, and opportunity risks, and the problems with inflation. I'll try to give them an advantage that I didn't enjoy at their age.

five steps: step 2 pay off consumer debt

This is the third in an irregular series on the five steps to solid wealth. Step 1 was spending less than you earn. Step 2, paying off consumer debt is generally (but not always) necessary to ensure solid wealth because consumer debt is expensive. It certainly puts you in the right mindset of not paying more (in finance charges) for something than you have to.

Consumer debt can be crippling. Interest rates are often high. You are paying through the nose for the privilege of buying what you can’t afford. It starts with stopping the use of credit. Pay it off by finding as much money as you can and throwing it at the debts. My favourite method is the Dave Ramsey debt snowball. I haven’t used it myself, but it comes with good references, and I can see why people stick to this method more than others. And that’s what’s important folks, sticking to it.

You can find great resources within the personal finance community on getting out of debt. In particular, no credit needed is the quintessential get out of debt blog and the archives on his site are immense. Get inspired and pay off your consumer debt.

Monday, 26 March 2007

5th carnival of ethics, values and personal finance post

I am so sorry for this delayed link to the carnival of ethics, values and personal finance @ stingy students. I apologise profusely for not being organised enough to realise that its on. Better late than never?

My post is in the also rans section. Which is no more than it deserves on this form. Check the whole carnival out though, and I'll try to do much better next time.

carnival of personal finance 93 post

tired but happy hosted the carnival of personal finance this week.

I didn't have a really great post last week and so didn't submit anything (I also forgot). But its great anyway, I particularly like silicon valley blogger @ the digerati life's post on her money mistakes, I'll freely admit that I am not always very organised and that has cost me money, I've also bought expensive things that I haven't really used - you should see how much I, with a fear of heights, spent on rock climbing equipment. I haven't made any of the other mistakes yet, but I've got a horrible feeling that I will do them all or worse.

the battered red briefcase

So, last week Gordon Brown delivered what is widely touted as his last budget before becoming Prime Minister. And as I'm sure all interested parties have heard, he left a stonking great big change until the end of his speech. The basic rate of tax has been lowered by 2p in the pound to 20%. Hooray!

Well, all the commentators pointed out that we'll be paying for this with the abolition of the 10% tax band. Still for people in my income bracket (earning between about £18,000 and £33,000) we'll be better off than before. For those paying income tax, but earning less than about £18,000 you'll lose out and be slightly worse off than before. Earning between £33,000 and £39,000 will see you worse off due to changes in NI bands, and earning between £39,000 and £43,000 will see you better off as the higher rate tax threshold has been raised. Earning above £43,000 and paying higher rate tax should see you paying close to the same amount in tax and National Insurance combined.

I'm not sure that I see the point of this tax change, even though it makes me better off. Its not a Robin Hood style tax cut (taking from the rich to give to the poor) as the benefits are unevenly distributed. I guess the tax-cutting headlines look good though. It certainly seemed to take the wind out of the sails of the Conservatives, which is probably the main target.

Friday, 23 March 2007

pfblogsround 23rd March 2006

I apologise for the slim pickings. Its not because there haven't been any great posts this week, but because I've been away on holiday and haven't had a chance to do as much reading. Anyway, this week the posts I've liked on other personal finance blogs have been:

I'll try to do better next week

Thursday, 22 March 2007

foreign money isn't the same

I haven't posted very much in the last couple of days because I've been in Brussels on holiday - I had a great time, thanks. Whilst I was in the capital of the Eurozone, I spent about £55 in cash, and about £140 on a selection of cards (mostly the one credit card I think).

I noticed, however, that the money didn't seem real. I found it quite hard to connect the euros that I was spending with the pounds that I earn. I think its interesting that the value of money (at least for me) is bound up in the currency I'm spending. For example, I have no idea whether the meals that I was buying were expensive or cheap (or the beer or chocolate for that matter).

I basically acted as if the euros were Monopoly money. Does anyone have any ideas about how I could have gone about it differently?

Wednesday, 21 March 2007

carnival of personal finance 92 post

I'm late posting that the Carnival of Personal Finance is up at lazy man and money. Its excellent this week - no theme, but he's actually read and summarised all the submissions.

Thursday, 15 March 2007

i'm gambling on not getting sick

I’m not getting critical illness insurance at the same time as purchasing my house. Under pressure from my mortgage advisor, I signed up for both life assurance and critical illness cover. It was just easier to do this than to have to defend a decision to go without. Within a fortnight however, (and before I’d handed over any cash) I cancelled my applicaton.

I decided not to go ahead for two main reasons. The first one is that I’m reasonably certain that the policy offered to me by my mortgage broker was not the cheapest available. They only offer policies from one company and it’s a truth universally acknowledged that shopping around will give you a better deal.

The second reason, and the one that explains why I’m not purchasing it at all, is that I don’t believe I need it.

The type of critical illness cover I was quoted for pays out a lump sum if you are diagnosed with one of a list of illnesses of disabilities. These are generally life-threatening or seriously life-altering diagnoses such as cancer, paralysing spinal injuries, etc. Its assumed that you will use the lump sum to pay off the mortgage so that you won’t have that to worry about.

In my case, I have no dependents and I have accident, sickness and unemployment (ASU) insurance already. This means that if I got one of the illnesses on the list, I would get a monthly income from the ASU insurance and no one else is relying on me to provide for them. I would also get this if I was diagnosed with a critical illness not on the list.

To me that’s a better benefit than paying off the mortgage completely, after all, I’ll still have other bills to pay. Knowing my luck I’d be bound to get something not on the list at all and then I’d have paid out the premiums for nothing.
So I’m gambling that I won’t get one of the illnesses on the list – and it seems like a pretty reasonable bet.

five steps: step 1 spend less than you earn

This is the second in an irregular series on the five steps to solid wealth.

Step 1, not spending more than you earn is the true key to being wealthy, in that if you do not follow step 1, I can guarantee that you will not be wealthy.

To establish whether or not you spend more than you make, you need to know only two pieces of information. How much income you have and how much you spend. Both of these are relatively easy to establish with the help of your bank and credit card statements and a calculator. (I like a small glass of wine as well as I find a modicum of alcohol eases my thought processes).

Ideally, if you have three months of bank statements to hand, you should be able to establish whether or not you are successful in this rule. If you are, congratulations, keep up the good work - probably easiest accomplished by making and sticking to a budget - and move on to step 2.

If you are not successful in this rule yet, you could find yourself in the position of trent during his financial meltdown, so you need to take action.
There are essentially two ways of turning this situation around. You can either earn more or spend less. There are loads of resources to help you find which flavour of these solutions you would like.

To boost your income, you could get a second job, turn a hobby into a business, take in a lodger, start childminding, sell your excess stuff at a car boot sale. To spend less, you can cut down on frivolous spending, move to cheaper accommodation, switch your bills, and get the best deal on everything you do need to buy.

The important thing is that you need to do something, and the sooner you start the better it will be.

pfblogsround 16th March 2007

Here are some of my favourite posts from other blogs this week:

the five steps to solid wealth: part 0

I'm going to be writing an irregular series on the five steps to solid wealth. These are the things that I think cover everything you need to do to become comfortably well off.

Spend less than you earn
Pay off consumer debt
Grow an emergency savings account
Insure yourself adequately and no more
Invest in the future

financial decisions this week 15th March 2007

This week I have mostly been not making any financial decisions. However, my mortgage application has finally been approved and the mortgage company claim that they have sent the paperwork to my solicitor. I'm less convinced because I received a letted from not my solicitor saying that they were delighted to help me with my mortgage. Nothing runs perfectly.

Wednesday, 14 March 2007

the great ISA stampede

As we draw ever closer to 5th April and the end of the tax year, you'll probably be noticing huge numbers of adverts for ISAs. That's right folks, its the great ISA stampede, when all the fund managers take out double page spreads in The Times encouraging you to invest your unused ISA allowance with them. This is fine and dandy, but if you haven't used your allowance for this year, what should you be looking for?

My first suggestion is to ignore the adverts, other than as a reminder that you need to get cracking. Secondly, think about what goals you have for your savings or investments.

If you are trying to save for a house deposit in the next couple of years, or you want to go to New York on a shopping spree before Christmas, you probably want a savings account. The current best buy for a plain vanilla ISA savings account is with Kent Reliance Building Society - as a bonus they are also pretty consistent with their rates.

On the other hand, if you've got money you can tie up for the medium to long term (think five years or more) an investment account will give you a good chance of getting a higher return. I think there are two key things to consider in choosing.

  1. How does this account work?
  2. How much will it cost me?

I understand how unit trusts work - they basically collect together a bunch of people's money and invest it in a variety of stockmarket shares, bonds or other investments - so I would consider investing in one of those. In particular I understand how index tracker unit trusts pick investments - they try to mimic the pattern of the index so they invest in shares in the companies that make it up. I think this makes them a good choice for a beginner investor, but as long as you research and understand, anything goes.

Investments are generally not free, I would always look for the cheapest way of buying it. With unit trusts, you will generally pay an initial fee and an annual fee. You should be able get the initial fee discounted to 0%. If you chose to invest in a plain vanilla FTSE tracker, you should be able to get an annual fee of 0.5% or lower. Good providers are Hargreaves Landsdown and Fidelity, but there are others. The key thing to remember is that the lower the fees, for the same investment the better.

Tuesday, 13 March 2007

misunderstanding pensions

I’m an avid reader of money makeovers and discussions individual personal finances and I’m struck by how often people say that they don’t trust pensions. I realise that this is affected strongly by the private pensions mis-selling scandal and the collapse of Equitable Life. And it’s certainly true that lots of pension funds have been adversely affected by the bursting of the dot-com bubble. But, I’m starting to think that lots of British people don’t realise what pensions are.

As far as I can see, pensions are just a tax wrapper. The wrapper is just a set of rules that allow you to get tax breaks. The underlying investment is what you should be relying on to make you money. It wouldn’t surprise me if many of the people who had money-purchase pensions in 2000, didn’t realise that some or all of their money had been invested in the stock market. And if they didn’t realise where their money was, they probably wouldn’t connect the bubble bursting with their loss of pension funds.

A pension isn’t something to be mistrusted; it’s just a set of rules. Your best weapon in preventing mis-selling is to educate yourself. If you want to mistrust something, then it should be the underlying investment. If you truly believe that shares are on average going to do worse than savings accounts in the next twenty to thirty years, then you can put a pension wrapper on a cash savings account.

Monday, 12 March 2007

carnival of personal finance post

This week's carnival of personal finance is on site with The Sun's Financial Diary

I had a post accepted which I'm pleased about - if you scroll down far enough, you might just be able to find it.

isn’t it nice when your values make financial sense

I believe that potentially irrevocable global warming is underway and that we all should do as much as possible to reduce our destruction of the planet. I’m not asking you to agree with me on this. If you disagree strongly, I won’t change your mind and you won’t change mine. If you think other things are more important then so be it.

Given that I feel this way, is nice to know that a good way of being environmentally friendly is to cut down on the amount of energy I consume. I no longer leave the tv on standby, I use compact flourescent bulbs for lighting, and I switch off lights and appliances when I no longer need them on. When I last bought a kitchen appliance (a washing machine) I chose one that was A rated for energy that had the features that I particularly wanted.

This is a good way of being environmentally friendly from a personal finance point of view because it saves me money.

Using less energy by switching the tv off properly and switching off lights and appliances costs nothing and reduces my electricity bills. Using compact flourescent lightbulbs is generally calculated to be cheaper overall, even though they cost slightly more to buy in the first place and the prices are coming down all the time. The washing machine I bought not only had the features I was looking for, but was also the second cheapest machine in the shop – I could have bought less efficient appliances for more money.

Its so nice not to have to make a compromise between what I believe to be the right thing to do and what is good for my bank balance.

Friday, 9 March 2007

pfblogsround 9th march 2007

Here's a roundup of some of my favourite posts this week in other personal finance blogs

switching from stakeholder pension to sipp

As I wrote earlier, I have been considering transferring my stakeholder pension to a self-invested personal pension (SIPP).

My basic investing philosophy at the moment is to put all my equity investments in index tracking funds, so currently I have a stakeholder pension invested entirely in a fund tracking the FTSE All Share index. The whole thing has a management charge of 1%, in common with most stakeholder pensions. The minimum regular payment is £1 per month and the minimum lump sum investment is £100.

The SIPP I am considering switching to is offered by Hargreaves Landsdown. Here I would invest in a different fund tracking the FTSE All Share index. This fund has a management charge of 0.25%, the SIPP itself has no fees associated with it and is touted by money saving expert as the cheapest SIPP on the market (unsurprisingly, as its basically free). The minimum regular payment is £50 per month and the minimum lump sum investment is £1000.

After a little discussion and thought, I decided that there wasn’t a good reason to stick with my stakeholder pension so I sent off for the application form. However, on reading the small print, it would appear that to transfer my stakeholder pension into the new SIPP it needs to have a balance of £5,000. I estimate that it currently has a balance of £3,800.

This leaves me with two choices.

  1. Continue paying into stakeholder and transfer when it reaches a balance of £5,000
  2. Start the new SIPP, leave the stakeholder where it is and transfer when the stakeholder grows to £5000

To decide which is the better option I got out my trusty spreadsheet tool and did some calculations. I know the amount that I am able to contribute each month to a pension so I used that together with an annual rate of return to calculate which would give me the better result. I assumed that the rate of return would be constant for simplicity and used the following formula to (iteratively) estimate the monthly balance of the pensions.

=(prev month balance + payment)*(1+growth)^(1/12)*(1-charge)^(1/12)

This showed that initially, I would be better off if I started the SIPP straight away. However, continuing with the stakeholder and switching once it reaches £5,000 would make me better off within a couple of months of reaching £5,000 and the difference increased as time went on.

I tried varying the rate of return rate and found that if I set the rate of return higher, there was less of a difference, but with a negative rate of return, the difference was exacerbated (and obviously it would take forever to get enough in the stakeholder to tranfer it).

Taking a leaf out of JLP’s blog to act on the maths, I’ve decided to stick with the stakeholder pension until it reaches £5,000 and then switch. Fortunately if the stock market grows overall, that should take me less than a year and even if there is a net decline, I’ll still be over the £5,000 barrier within two years.

Thursday, 8 March 2007

financial decisions this week 8th march 2007

Last weekend, I bought some beautiful new things for my house – spice jars, a casserole dish. These have been on my wish list for ages and came out of the new clothes and home section of my budget. I also treated myself to breakfast in town, which was delicious. Altogether I’m very pleased with my spending decisions. I’ve also looked into switching my stakeholder pension into a SIPP although I think I will wait until SIPPs are regulated by the FSA.

Wednesday, 7 March 2007

mentally spending a non-existant windfall

Recently I was lucky enough to receive a substantial windfall of shares. I knew about six months in advance what the likely amount of it would be and I planned to spend it mainly on a deposit for my first house.

Having the time to decide how to spend it made me think that it might be useful to have an idea how I would spend any further substantial windfalls. This idea is also explored in Chapter 15 of The Bogleheads Guide to Investing which was the subject of a blog book review.

My favourite windfall would come from winning £125,000 on Who Wants to be a Millionaire and my least favourite is an inheritance from my parents, but I’ve decided that my general principles hold for any windfall above £5000. I would spend up to 60% of the total paying a big chunk off the mortgage, donate 10% to charity, spend 2.5% indulgently on myself and my family and up to 25% on having a large emergency savings pot. If there was any money left over, I’d invest it – probably after considering the options carefully for a few months.

What would you do with a windfall?

Tuesday, 6 March 2007

comparison of US and UK investment concepts

401(k) / 403(b)defined contribution (dc) pension
A 401(k) or 403(b) is basically the same as a defined contribution or money purchase pension offered by an employer. In both cases, if you contribute, typically your employer will also contribute – this is typically referred to as an employer match. Also in both cases there is often a restricted list of funds that you can invest your money in. The main differences in the pension rules set by the respective governments are about how much money can be invested free of tax, when you may withdraw the money and what you must do with it afterwards. Any money you put in these products is invested with pre-tax income and taxable when withdrawn.

tax deductible traditional IRApersonal or stakeholder pension

A tax deductible traditional IRA is basically the same as a personal pension (including stakeholder pensions). In both cases you can invest money with a huge range of providers in a wide variety of funds. There are large differences in the rules about how much money may be invested – personal pensions have significantly more generous rules than IRAs – which is probably why IRAs are not as often recommended as stakeholder pensions are. Any money you put in these products is invested with pre-tax income and taxable when withdrawn.

roth IRAstocks and shares ISA

Roth IRAs and Stocks and Shares ISAs are similar investments but there are significant differences in the rules in each scheme. In each case, money is invested from taxed income and grows and can be withdrawn tax-free. There is a limit to how much money can be invested each year of several thousand pounds/dollars. In both cases you can invest money with a huge range of providers in a wide variety of funds. The major difference between the two schemes is that money may be withdrawn tax-free from an ISA at any time whereas a Roth IRA has restrictions on tax-free withdrawals.

?? ≡ mini cash ISA

There doesn’t seem to be a comparable investment product to a mini cash ISA which are tax-free savings accounts. I believe the most similar investment would be a Roth IRA invested in a money market account.

S&P 500FTSE All-Share
These are the same in the sense that they are stock market indices which track the vast majority of company shares in the respective countries.

Securities and Exchanges Commission (SEC)Financial Services Authority (FSA)
These are the regulatory bodies for investing in the respective countries. There are differences in the exact areas of finance that they cover.

mutual fundunit trust or open ended investment company (OEIC)
These are open ended entities into which you may invest. In each case they pool the money of all the investors and use it to buy into other investment products such as shares and bonds.

Monday, 5 March 2007

carnival of personal finance post

This week's carnival of personal finance is on site with Map Girl.

I've had a post included in Carnival Sideshow Two which I think is pretty cool.

housing market crash?

Again last week I watched an episode of Tonight which had a monetary slant. In this case it was about whether the housing market would crash or not. The gist of the programme was that there was a panel of three people, property search agent Phil Spencer, journalist Jonathan Maitland and columnist and landlord Rosie Millard. Then some experts presented a segment on whether they thought the housing market was on the brink of crashing or not. The conclusion was that Millard and Spencer (who both have something to lose if there is a crash) thought that there wouldn’t be a crash and Maitland thought that there would. Spencer was more confident that Millard.

It wasn’t the greatest show ever, but it wasn’t too bad. I cooked and ate my dinner whilst watching it so I didn’t exactly give it my full attention. It got me thinking though about the main factor that I thought they didn’t mention. General inflation.

You see when you’re borrowing a fixed amount of money, inflation is your friend. Every year that goes sees the relative cost of a mortgage payment dropping with the miracle of compound interest.

If I don’t move house and wait long enough, my house will be a rent-free place to live. What more could anyone want. In any case, eventually any house is likely to be worth more than it is today. That’s inflation for you.

Friday, 2 March 2007

switching current accounts

I’m currently in the process of switching current accounts away from a very low interest bank account (think 0.1%) into a high interest bank account (think >5%). I certainly should have done this years ago, but better late than never.

I opened the original account when I was a student as it had the highest free overdraft facility at the time. I employed the tactic of withdrawing money up to the overdraft limit and depositing that into a high rate savings account. I then used the account as normal. Of course, I spent the overdraft and it took me until the point at which it was about to expire to pay it back. Since then I’ve been earning practically no money on my current account at all.

So why didn’t I change current accounts sooner?

Inertia. I don’t like to run round like a headless chicken looking for the best deal all the time. (I don’t mind doing it periodically.) I wanted to be sure that the account I switched to was likely to stay as a good deal having been burned with high interest savings accounts previously.

I also liked the customer service from the bank I was with. They have lots of branches and good telephone banking.

Fortunately, I’ve had good experiences with my new bank so far. The transfer has gone smoothly. I’m still paranoid that the payments will come out of the wrong account so I’ve left a healthy balance in each to ensure there aren’t any problems. I’d go as far to say as I’d recommend it, but I don’t want to do it again for a few more years.

Thursday, 1 March 2007

money scripts: house buying

In common with a lot of people, I’ve grown up with some scripts relating to money. By this I mean things that I have absorbed in childhood that I have never questioned. One of those things cropped up during my current house purchase.

Somewhere in my life I have learnt that ‘you should always have a full survey carried out on a house’.

For background information, there are basically three types of survey:

  1. Mortgage Valuation Report – how much is the house worth?
  2. Homebuyers Report – what are the major problems with the house?
  3. Building Survey – what are major and minor problems with the house?

Obviously, as the surveys become more detailed, they become more expensive. With my combination of house price and mortgage company, the choices I had were £250 for a valuation, £500 for a homebuyers report and £950 for a building survey.

The house that I’m buying is a small late 19th / early 20th century terraced house. The sort that’s fairly common in my area and right across the Midlands and north of England. Most people are advised to have a ‘homebuyer’s report’ as a kind of third way, particularly if they’re not planning on doing any alterations. This is how I was advised. By the mortgage broker, two people from the surveyor’s firm, the estate agent and by almost everyone I know.

Some people actually took it as a personal insult that I would actually consider having a full building survey done. I was told that “after buying a few houses, you soon recognise the major problems”. This is my first house purchase ever.

Really, I think they’re right. It would be financially more sensible to go for the cheaper option as there is unlikely to be anything wrong with the property that the homebuyer’s report wouldn’t pick up. But it’s not just about the money.

In the end, I decided that the script was pretty ingrained. I know absolutely nothing about houses, and wouldn’t recognise a problem if I saw one anyway. I’m buying on my own and need as much reassurance as I can get. Spending a few hundred pounds on researching a purchase worth tens of thousands of pounds is fine by me. I’ve had the survey done and it’s given me a list of little maintenance jobs that need doing. None of them are particularly urgent. The biggest thing is some damp in the downstairs bathroom extension, which makes sense. The house is in average condition for its age and its not falling down.

Sometimes, you really can buy peace of mind.

net worth statement 2006