setting goals

I posted earlier that maybe getting out of debt was easier than just trying to get rich and the primarily this was because when you're getting out of debt you have a particular target. brad @ analyzing wealth commented on the post and kevin @ kmull stated in his roundup of the carnival of personal finance that I should set some goals. In particular brad said that I should create some arbitrary goals and kevin said that I should create some SMART ones. Also, recently trent @ the simple dollar has been running a series of posts on setting goals.

So, I've decided to set some arbitrary, SMART (specific, measureable, attainable, realistic and timely) goals.

1. I am going to invest £2700 in retirement savings in 2007.
2. I am going to invest £1200 in my stocks and shares ISA in 2007.
3. I am going to donate £250 to charity in 2007.

I was going to write a fourth goal which was not exactly personal finance related to do with decorating my new house, but I thought that it might be a little pre-emptive since I haven't finished the purchase yet.

So there we go, there are my personal finance goals, I hope you all think that they are good, they are certainly arbitrary, specific, measurable, and timely. Now we just have to see if they make me think that becoming rich is do-able.

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).

mere christianity and the library

I'm posting this in a futile attempt to win to trent's book giveaway @ the simple dollar. He wants fifty words in response to one of his previous posts. In fact, trent's probably already read some of the beginning this response as I emailed him about the post I've selected. Since I can't win the book anyway (read the rules), I figure thats not too much of a problem! Anyway, here goes:

I finally got round to reading Mere Christianity after trent recommended it on his blog and a couple of other people mentioned it to me. It has made me think a little more about what I believe.

I feel that Lewis' argument using Moral Law as a basis for assuming the existence of God and the subsequent argument in favour of Christianity requires a leap of faith and is not an irrefutable argument in favour of Christianity, although it is a good one as these things go. Throughout the opening section of the book, I struggled to maintain an open mind.

However, having more than a passing interest in Christianity and religious belief I found the later sections an excellent statement of Christian belief and what it should mean to be a Christian. Even though I think that Lewis is incorrect - that is I personally do not think the world is correctly viewed through the Christian paradigm as he described it - I found many of the actual concrete ideas illuminating, especially the ones on judging (or as is preferable, not judging) individuals based on their actions.

The most important impact that trent's post and Mere Christianity have had on me and my personal finances though, is that I have joined my local library. I was motivated to read this book, but didn't want to spend money on a book that I wasn't sure that I would like so I looked on the web catalogue of the library to see if they had it in stock. They did, and so I joined the library just to borrow this book.

As a voracious and speedy reader, this is saving me money on the purchase of books and making me happier. In addition, I am spending time in the library and reading my library books instead of heading to the shops and purchasing more clothes, magazines and cds. Joining the library has also motivated me to do more free things, such as visiting the local art gallery and attending free concerts. So thank you to trent, cs lewis and the library, you guys are saving me a fortune.

pensions are actually invested in equities

I've just been reading a Wealth Check in the Independent. Its one of those things where they take someone's current financial position and three or four experts offer their advice.

I'm so annoyed at the final piece of advice that they've given the woman, on her retirement and pensions. All the experts quite rightly say that this 23 year old should start saving for her retirement immediately. They correctly say that she should see if her employer offers a scheme and if not, to consider a stakeholder scheme. All well and good. However the final piece of advice given by Danny Cox of Hargreaves Landsdown is:

To boost her retirement fund and increase her chances of earning more money than expected, she should consider investing in equity-based funds. Although there is risk entailed, Cox advises that Katherine will benefit in the long run if there is a downturn in the market, if she has her money in equity rather than stakeholder savings.

This is a completely misleading statement.

It implies that in general payments into a stakeholder will be into a sort of savings account. This is pretty much never the case. The value of a stakeholder pension may go down as well as up, but over the 40 years this woman has, it is pretty sure to be up. Basically, the money in a stakeholder pension is normally held in equities (at least in part) and in particular, it often held in an equity-based fund.

I think what the expert was actually trying to suggest was that she hold some of her money in actively managed equity funds that hedge against a stockmarket fall. I have issues with whether or not that is good advice, but in this article, that isn't what is stated anyway.

The reader is left with the impression that money in a stakeholder pension is not in equities and that it is in "savings" (with the guarantee that implies). This is so not true of stakeholder pensions in general, its ridiculous and the suggestion that there is a reasonable likelihood that over the next 40 years the stockmarket will be lower than it is now is not even being given the short shrift it deserves :(

credit card ads

Last night, I was watching some rubbish on tv. It was on one of the commercial channels so I was plagued by ad breaks every quarter of an hour or so. One of the ads was for a Capital One credit card. It was advertising that Capital One has a lower interest rate than some other banks, and maybe you should switch to them to stop the interest from dragging you down.

This advert got me to thinking. If adverts reflect society then that means that its ok as far as society is concerned to be permanently in debt. But if you are forever in debt, then how can you get ahead. I find it really difficult to conceive of amassing any great sum of money, and think that it woud be a lot easier to try to get out of debt as at least you would have a goal to aim at. But then, how much harder must it be to contemplate having any money. And how much money must you spend on finance.

I guess people don't think about it too much. What should I be doing to change this? How can we make saving and investing more attractive?

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.