getting out of debt would be easier

Unlike many people, I'm in the fortunate position of not having any consumer debt. I often use my credit card, but it gets paid off in full every month. I have student loans, but at the interest rate they are on, it makes more financial sense to pay them off as slowly as possible. I've never had a problem with overspending so a subscribing to a completely debt free lifestyle doesn't have major psychological benefits.

With that said, I often feel that its easier to get out of debt than it is to start with a little over zero and just try to grow it. When you're in debt, you have that initial target that you can motivate yourself for, getting to the stage where you have no debt. This means that you have an end in sight and when you're struggling you can convince yourself that this is just temporary. By the time you get to being debt free, you are in the more frugal mindset.

In contrast, I don't have any immediate goals for my money. I only want to be rich eventually so that I don't have to stack shelves in my old age. Its hard to motivate myself when my net worth is so small. I'm trying to maintain a balance between saving and spending, but I don't make a huge salary and what I can contribute seems pitiful, yet I feel slightly poor.

In short, it feels like I'm getting nowhere fast and I'm hideously tempted to put myself into debt buying stuff that I would love to have and then work my way out of it. I don't do this, because doing this deliberately would rank as one of the stupidest and most ridiculous financial mistakes of all time. Still, at least I'd have a goal to aim for.

money and security

In another doomed attempt to win a competition for which I am not eligible, I'm going to give a response to a post on five cent nickel's blog. Here is the mandatory link to his welcome page - sorry couldn't work that into the intro.

Apparently, Dave Ramsey is a well known personal finance guru in the US. The Dave Ramsey plan is multi-step and simple. The second step is the most ubiquitous. Pay off all your consumer debt using "The Debt Snowball".

In the debt snowball, you pay off your debts in the order of smallest balance to highest balance, the principle being that with early accomplishments you are more likely to stick to the program.

Five cent nickel's most commented upon post is Dave Ramsey is bad at math, later he responded to the comments with another Dave Ramsey is good at psychology. Its undoubtably true that the debt snowball will not necessarily save the most money when it comes to paying down debt. As explained in the bad at math post, the cheapest way to pay off all your debt is to order the debts from highest interest to lowest interest. The key point that most of his commentators wanted to say was that it wasn't about the math, which nickel summarised in the good at psychology post.

Its true that debt - especially debt caused by overspending - isn't about the math, or the money. Its in the mind. In my favourite money programme, Spendaholics, the individuals cannot stop overspending until they address the underlying cause(s). But what if your money issues don't revolve around overspending? In my case, I have no consumer debt, just some exceedingly low interest student loans and I'm soon to take on my first mortgage. I'm not a good candidate for Dave Ramsey's plan because I don't have issues with too much debt. My money issues resolve around security.

I often work out worse case scenarios, like I lose my job, or I become permanently disabled, or I unexpectedly have a child. Not in the case of how this would affect my life, but whether or not I would be able to cope financially. Is this healthy? Is there a plan that will enable me to feel truly free, without sitting on a massive pile of cash in a savings account? Should I mentally rely on the safety net of my parents, even though I'm extremely loathe to ask them for help?

I feel like, maybe this is an age thing. I'm in my late twenties, and I've been living more or less independently since I started university. Perhaps I'll just get used to this feeling and learn to cope. What do other wiser (older?) people do? The feeling of being permanently on the precipice of disaster needs to be mitigated. Perhaps as in Spendaholics, therapy is the best answer - but if I have to pay for that, thats more money spent and less money saved. And how can an independent individual with a traditional British stiff upper lip, truly contemplate therapy anyway. Isn't it all a bit, well American?

Suggestions on a postcard please (or if you don't know my address, just add to the comments).

wealth and IQ

I was reading in the free paper the Metro the other day that some scientists had found that people with a higher than average IQ were no more or less likely to be in wealthy than people with average or below average IQs in the same circumstances.

What does that tell us about personal finance? Its not about the numbers, its about the psychology. It certainly doesn't take a genius to work out that if you spend less than you earn and invest the difference, you will become wealthy. I bet that most people know that but encounter difficulties in putting it into practice. Qualities like will power, discipline and determination aren't measured in an IQ test, but those are the ones that you need if you want to take the tortoise route to success.

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?

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.

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.

in response to renting or buying @ the simple dollar

Trent at the simple dollar posted on comparing renting to buying a house. He suggested that when looking at similar standard properties,

1. if rent exceeds the mortgage payment then a mortgage is (financially) better
2. if rent exceeds the interest portion of a mortgage then its a grey area
3. if rent is less than the interest portion of a mortgage then renting is better

In any case he suggests that if renting is a cheaper option, you should save or invest the difference towards a deposit. Trent does assume that your rent will only be less than the interest portion of the mortgage payment if you haven't enough saved for a deposit which, I think, depends on how you define enough.

Anyway, I've compared my planned mortgage payment and rent to see how it stacks up.

Rent = £375

Mortgage = £493

Interest on Mortgage Initially = £400

It looks like I shouldn't be buying at all, but continuing to rent. However, Trent actually states that you should consider the interest payment after 5 years as a fairer representation of the grey area. For my mortgage I have

Interest on Mortgage after 5 years = £370

Wow, thats a pretty close thing. I'm in the grey area by the skin of my teeth. Trent suggests that I consider the utilities, tax and maintenance issues to determine whether I should rent or buy. In my case, I can pretty much assume that the utilities and tax will be the same but maintenance and insurance costs will be higher.

I think this means that strictly financially speaking I'd be slightly better off renting and saving more money towards a deposit. Which goes to show that buying a house isn't just a rational, financial decision for me. I already knew that it was a marginal decision but I want a place of my own and I'm prepared to pay for it.