Podcast Scripts

Episode 3 What to do about debt

What to do about debt

This is the last of the preparatory episodes before we get into investing proper. We are going to deal with debt and whether you should clear debts before you invest or is it better to keep the two separate?

Debt is a big issue in the UK. Don’t take my word for it though; here are some facts courtesy of The Money Charity

Average credit card debt per household in January 2019 was £2,638 which doesn’t sound too bad. In the last episode the credit card example I used had a £1000 debt being paid off over 2 years. It assumed a £50 a month payment and the balance was cleared after two years. But…a lot of people make the minimum payment each month usually the higher of 3% or £5.

The Money Charity says that the average credit card interest rate in January 2019 was 18.67% which is way above the Bank of England base rate of 0.75%. And if you pay off the average credit card debt making only the minimum payment per month, it will take you 26 years and 7 months

The National Audit Office reported in September 2018 that 8.3m people cannot afford to pay off their debt!

So yes, debt is a big issue for a lot of people. I said in the last episode “avoid credit cards like the plague” and that hasn’t changed. Paying an average of 18.67% interest to buy something is not good for your long term financial health.

Earl Wilson an American journalist once said, ““Today, there are three kinds of people:  the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s.”

The question for this episode is, “should you pay off your debt before you invest?” This is clearly not a problem you need to worry about unless you have both debt and money to invest. If you’ve no money to invest, check out the last episode.

Assuming that you do find yourself in the situation of having spare money and debt you may be one of the many people who never stop to consider what to do. Why is that? It probably has a lot to do with the order in which things happen. Most people have debt, such as mortgages, long before they have enough money in the bank to think about investing. The average age for a first time buyer these days is 33 according to the BBC. That means people are saving for deposits and costs of buying a first home until that age. For other people it can be that they rent their first flat and take on debt to furnish it.

When they do finally find that lump sum sitting there, it can be a long while after the mortgage or other debt started and the repayments have become just part of the monthly outgoings. They are almost “out of sight out of mind”. Because of this it is too easy to look at the lump sum in isolation and think about how you’re going to spend it or where you’re going to invest it.

There is an emotional attachment to having money in the bank – more than you need for your emergency fund. It makes you feel wealthy, comfortable. But you really need to consider the debt as well. It’s like two sides of a seesaw, one can lift you up and the other can pull you down. As a very general rule…If you earn more on your investment than you pay for the debt then invest. But there is a lot to consider before you leap in! You need to know how much your debt costs and what returns your investment will give you.

Looking at investment returns, most people start out with a deposit account and these days hold it in an ISA. So how would they be doing? Not so well I’m afraid. The average interest rate on a cash ISA in January 2019 was 0.84%. There is a huge difference between what you pay for debt and what you earn on your savings.

Let’s look at the credit card example. As I mentioned the average credit card is charging 18.67% and the average cash ISA is paying just 0.84%. If you have a credit card debt of £1000 it will cost you £186.70 in interest over two years repaying £50 a month and that is a big “if”.

If you find a spare £1,000 to invest and you pop it in a cash ISA you will receive £16.87 interest over two years. A negative difference of £170. You are worse off because the investment earns far, far less than the credit card debt costs you.

You will already have jumped to the right answer – in this case it is better to pay off the credit card than invest the £1,000 in a cash ISA.

But there is more to it than that. Remember you were paying £50 a month to your credit card. That is money you should save each month. What happens if you invest that £50 a month in the cash ISA? It will be worth £1,210.52 in two years’ time versus the £1016.87 your cash ISA would be worth. So while you may feel you have “lost” the £1,000 in paying off the balance you are actually much better off if you use the monthly savings to replace it.

God this is boring! And if I’m bored then you must certainly be! When I was presenting at conferences I could see the audience and interact. That’s clearly not going to work with a podcast. I used to use humour in my lectures so I reckon that I should give it a try here.

I tried to teach my dog how to dance – it didn’t work out. He’s got two left feet.

The self-deprecation society is opening a branch in my town. I’ve  put myself down already.

My knowledge of Greek mythology has always been my Archimedes heel.

Don’t forget you can feedback using the contact page on the site, http://www.poundsshillingsandsense.com

Back to the boring stuff…

We’ve looked at credit card debt, but how does it work for mortgages?  The rates are much lower than for credit cards because the lending is secured against your property. The average variable mortgage interest rate in January this year was 4.48% according to the Building Societies Association. Is it worth keeping mortgage debts? As a general rule if you can earn more on your investment than you pay for your debt, you will be better off investing. If your investment earns less than your debt costs pay off your debt. In practice the answer is “it depends”.

There are some types of debt that carry exit fees for early repayment such as fixed rate and discounted mortgages. If you are not sure about your loans then check with your lender. Such fees need to be taken into account in the decision you make and can make a big difference.

Clearly if you are earning 0.84% on a Cash ISA and paying 4.48% on your mortgage then your debt is costing you more than you are earning on your investment. Remember compound interest – the longer the term the greater the impact. An ISA earning 0.84% a year over twenty years will grow by £182.11. How much would you save in interest if you repaid that £1,000 off your mortgage? Halifax has a calculator on their website which works out the benefit of overpaying your mortgage. When you feed the details in the answer it gives is a saving in interest of £1,382 versus the interest earned on your ISA of £182 that’s a big difference.

But that is based on a fairly low rate of return on the ISA. You might be thinking “Hang on matey,  you said in the first episode that returns of 7% are achievable at the moment on investments”.

Surely then, it is worth investing if you can get that sort of return? But the answer is again “it depends”.

The 7% return is the growth in the value of the investment before you pay charges to the fund manager and tax on any profit. Those two factors can make a big difference.

Fund management charges can vary hugely from as little as 0.05% a year to well over 2.5%. When you do make a profit the taxman will want to know about it. Investment profits can be charged to income tax, capital gains tax, dividend tax or all three. It is too much to cover in a single episode so I plan to cover it later in the series (unless you write in asking for it to appear sooner!). But for now be aware that ISAs are free of tax on profits made whether that is from growth or income. There are savings income allowances as well and you can find out more here

If you do pay tax it can reduce your returns by 20%, 40% or 45%… or more (higher rates apply in Scotland) after you have paid the charges on the fund. That means for a basic rate taxpayer the amount they receive in their hand on a 7% return could be as low as 3.6% – less than the interest on their mortgage.

So is it ever possible to get a return higher than your mortgage? Yes. A few years ago the government introduced Auto Enrolment pensions in the workplace. From this April you have to pay a 3% contribution, your employer has to pay a further 2%. That means for every £3 you pay in you have already made £2 in profit before charges in tax – that is a 66% increase before you earn any investment returns. Some employers operate pension schemes which are better than Auto Enrolment and you could find that they match your contribution up to a certain level. That is a 100% return before you earn investment returns. When you do enjoy growth on your investment in your pension it is free of tax at source, much like an Individual Savings Account. As if that isn’t good enough, on top of that, your pension contributions receive tax-relief. A basic rate tax payer putting £100 in to a pension only pays £80 out of their pocket – an uplift of 25% before your employer adds to it. There is tax to pay when you take benefits from your pension. Any income you take is taxed at your marginal rate but you can take 25% of the fund free of tax.

Choosing the right investment product can either damage your wealth or turbo-charge it.

There is another factor to consider before you rush out and pour all your money into investments. How long the debt has to run is critical. The shorter the term the loan/debt has to run the more risk there is. To get the 7% returns I mentioned will mean the investments you hold go up and down in value. Riding out those ups and down is much easier over 25 years than 3 years. The last thing you need is to find your investment has plummeted in value just when you need to pay off your loan.

Which provides a neat segue to the next episode, where I will look at investment risk. Or more accurately – investment risks!

To summarise – in general it is better to clear your debt before you invest and to clear the highest interest debt first. But it is not a golden rule – it does depend on the debt and the returns you can make on the investment. If in doubt seek advice from a regulated financial adviser. Click here for the FCA webpage on choosing one.

Don’t forget to spread the word and help reduce the wealth gap. If you share my sense ofhumour follow me on Twitter RL2 and if not – use the contact page!!!

Catch you next time.

Episode 2 Why and how to save

Great to have you back and I assume that you didn’t go out and buy the wheelbarrow, shovel, seed vegetables and shotgun. Thanks to those of you who got in touch with feedback and particularly to Colin for spotting a typo in the transcript on the website. One piece of feedback I want to deal with is that some people might not believe that these podcasts are free and editorially independent. All I can say is …they are. But perhaps the only way to find out is to keep listening and make your own mind up!

This episode is about why and how to save. I’m going to do the “why” first. There are two reasons, 1. to avoid the impact of the nasty things in life and 2. to have the life that you do want.  Some of what I am going to cover is going be a little glum to say the least. To make sure I don’t leave you feeling depressed at the end of this, I’ll leave the positive messages to the end – the ones about how to have the life you do want. I wish there was a better way of telling you the not so nice stuff but you need to hear it.

Everybody – even those who have absolutely no desire to be wealthy should be saving. The need for saving isn’t just about accumulating wealth; it’s about avoiding nasty shocks in life too. Those shocks can be both unexpected and expected. First the unexpected…

There is a better than one in three chance that you have not saved enough, in 2016 Shelter reported that 37% of households would be unable to cover their housing costs if one partner was out of work for more than a month. Housing costs are your rent or mortgage costs. The fact that so many people are a month away from not being able to cover those costs is shocking! It’s shocking because it means millions of people are taking big risks with their future, their security and probably their family’s security. It isn’t just losing your job or being off sick. If you are in a relationship that breaks down you will be in the same position. If you split up, one of you will stay in the home the other will have to move out but where will they find the money to rent a new place? Surfing sofas can only last so long and adding homelessness to the upheaval of a broken relationship? Well best to avoid it.

What actually happens if you can’t afford the rent/mortgage? Landlords usually try to be helpful but it depends on the landlord. Local authorities, housing associations and private landlords can be very different. Most importantly, non-payment of rent is grounds for eviction and you could be evicted within a few weeks – if you are concerned about this  right now then check out the Citizens Advice website for more information,  https://www.citizensadvice.org.uk/debt-and-money/help-with-debt/dealing-with-urgent-debts

If you own your home with a mortgage you will find that most banks and building societies will be pretty helpful if you are going through a tough time. But you must tell them as early as possible if you can’t make a payment.

Poverty is a major structural cause of homelessness and rough sleeping. Having a pot of money – enough for a deposit and a month’s rent would solve that! If you haven’t got that money saved and safely tucked away – you cannot afford a holiday…yet!

But there are steps you can take to avoid the problem

As a priority everyone should look to have three months money saved and easily accessible. In financial planning we recommend that this sum is in a bank or building society with immediate access. This is money you cannot ever afford to risk and cannot afford to tie up. You just night need to get your hands on it quickly one day.

Work out how much you spend every month – (it might be the same as how much you take home in pay each month) and then multiply by three. That is a pot of money you must only touch in the event of an emergency. So don’t touch it, unless there is an emergency – that is you lose your job, you’re off sick and not receiving enough sick pay. To be clear – a holiday, stag weekends, new TVs and Christmas presents are NOT emergencies!

When my son got a job I had a conversation with him where I told him everything I have just told you. In less than two years he’d saved up a three month emergency fund. A while later he moved  into his first flat. One week later he called me and said he might have to reapply for his job! With his nest egg behind him the news was nowhere near as stressful as it was for some of his colleagues. By the way – if you are employed consider unemployment insurance – £8 a month will get you £500 a month for a year if it happens, money well spent! If you are self-employed or your employer offers no sickness benefit, check out sickness and accident and permanent health insurance.

Hopefully you now recognise the need to have some money behind you. But how can you save when you are struggling to make ends meet? There are a lot of people who genuinely believe their bills and expenses mean there is always too much month and the end of their money. Perhaps you are thinking that the only way that is going to change is if you get a big pay rise.

But you are almost certainly spending money you don’t need to. There are two ways to deal with bills – cut them down or cut them out. Some bills you cannot do anything about, rent , mortgage, council tax, food but there are others you can tackle. As a priority in cutting bills down, look at energy, it is one of the big bills for most people – have you switched or looked at the savings that switching supplier can provide? I have switched 6 times and saved between £500 and £700 a year each time! https://www.uswitch.com/?ref=ppcgoogle~brand~000641~uswitch&gclid=Cj0KCQiAurjgBRCqARIsAD09sg8AFoG4qHJqPz7_1Ct1927ILjO-DjNT3lveMhWBhhkELGsA7tHCNCgaAsbHEALw_wcB

Other areas you can save are broadband and telephone, insurances and mobile phone contracts. Again check out uswitch – but bear in mind there are other comparison sites and sometimes they promote deals they get paid to promote!

But let’s assume you have done all that and still can’t find money to save? You might need to look at whether or not you are spending on things you don’t really need. These are the bills you need to cut out. Do you need the latest IPhone, tablet, laptop, taxi home, Uber Eats/Deliveroo/Just eat or pre-prepared meal? Martin Lewis of Money Saving Expert has written an excellent article on how to spend less available here,

https://www.moneysavingexpert.com/family/stop-spending-budgeting-tool/

Spending less is a habit you might need to work on. There are people on very low incomes who are managing to do it. The government announced a “Help to Save” account in 2016 for people on working tax credit and universal credit. It is early days but over 90,000 people have been able to save through the scheme. If you are not on one of these benefits you too should be able to save.

Next, avoid credit cards like the plague! Borrowing £1,000 on a card at 19.9% and paying it back at £50 a month will take two years to repay and cost a total of £1,201. In other words you will pay 20% more for whatever you bought just because you used a credit card and you won’t own it outright for 24 months.

If you saved up to buy it would take 20 months to own and you would be £201 better off. On top of that two things happen. First, because it is your money and not the bank/credit card companies’, you think differently about what you spend it on and how you spend it. Second, you start haggling for deals and shopping around – when it is your money. So instead of spending a £1,000 you might get the same thing for hundreds less. You’ll find you’re much more careful about overspending when it is your money you are using. When you think it isn’t your money… you’re more willing to spend it.

In the last episode I quoted Albert Einstein on compound interest it is “the eighth wonder of the world, he who understands it, earns it; he who doesn’t, pays it.” Don’t be on the wrong side of it, don’t use a credit card unless you are going to pay the debt off every month without fail.

I wish there were a cheerier way of giving you all this glum news. But before you think about investing you need an emergency fund.

Earlier I said that expected shocks happen as well as unexpected. The big one is retirement. People either put off thinking about it or believe that the state will pay them enough when they retire. Let me share some more depressing facts with you. A recent article by Which? reported that their average retired member spends £2,200 a month. Now that is probably higher than the national average but it is a figure you can benchmark yourself against. £2,200 a month is £507 a week. What will the state pension give you? £168 a week as a single person and £258 for a couple. Which? estimated that to retire on £26,600 a year you need nearly £250,000 in a pot of money. If you aren’t on track for that you have four options,

  1. Spend less in retirement
  2. Save more now
  3. Get a better return on your savings
  4. A mix of the three

At this point you might be thinking that I am a bit of a killjoy telling you to save and spend less! But it’s only taking a one-off step back so that you can move forward. It doesn’t mean never enjoying yourself, it means being sensible. Forgo a few things this year – get used to spending differently and make things easier for the rest of your life. Properly looking after your money means less worry, less stress, more peace of mind.

Now for the more positive part of the episode.

Last time I covered the difference between speculation and investment – how investment is about doing better with your money over the long term NOT about getting rich quick. In case you missed it or have forgotten here is a reminder…

£1000 invested at 7% a year will grow to nearly double over ten years. I want to look at what happens when you save regularly.  If you add £100 every month to the £1000 in the last example can you guess what you would have in ten years’ time? over £19,000.

But that is just over ten years. Let’s look at what happens when you look at even longer terms. Over twenty years instead of £19,000 you would have £55,000 and over thirty years £125,000.

So the longer you invest the bigger the benefit. Another way to turbo charge your savings is to increase the amount you save each year. As you get pay rises you should be able to afford to tuck away a little more. Increasing your monthly savings of £100 in the thirty year example by just 3% each year will provide a pot of money just shy of £170,000. 

Long term and sensible risk levels reap rewards! Or put another way – getting rich slow is better surer than getting rich quick.

Oh and of course – you have to resist the temptation to spend it all before you get there!!

Net time I will look at whether you should invest if you have debt. Is it better to pay off your loans or mortgages first? It will at the very least be more cheerful!!

Don’t forget that you can read the transcripts on the website or get in touch using the contact page at www.poundsshillingsandsense.com. Please if you think that what you have heard is worth sharing then please pass it on.

Catch you next time. But for now, if you think you can’t afford to save – think again, you can’t afford not to!

Episode 1 Pounds Shillings and Sense

Investment and speculation

Hello and welcome to the very first episode of Pound Shillings and Sense with me, Richard Leeson.

This is a guide on how to invest money and how to invest it properly. It should appear to you if you’ve got money in the bank or building society, investments, premium bonds or just an interest in investments.  If you haven’t got any money don’t worry in the next episode I’ll be giving some tips and ideas how to get some together and then how to go about investing it.

There is a website to accompany these podcasts and you can access the broadcasts and the scripts that go alongside it, so if you prefer to read rather than listen, you might find that suits you.

By way of background, I decided to set up Pounds Shillings and Sense, because there is almost nowhere to go to find out the information that it contains.  If you try and use the internet to find out about investment you’ll be taken to a whole stack of sites that will tell you an awful lot about US day trading that you really don’t need to know. In the UK there are only two major websites which are Money Advice Service and Money Saving Expert and whilst they are both very good they are quite general so will cover everything from Pet Insurance to Mortgages, credit cards, pensions and divorce.   This is just going to be about investments.

In this first episode what I’m looking to cover is a little bit about my background and expertise, what it is I’m trying to do, and perhaps what I’m not trying to do, and something of the values and approach I like to work with.  And then finally, going on to the first episode which will be a comparison of speculation and investment. 

So let’s begin.

I have over 37 years’ experience in investment with the last 25 years specialising in dealing with multi-millionaires, including some celebrities, some well know business figures and even a few politicians. Over the years I have listened to my own advice and that has allowed me to retire in my mid-fifties despite having been financially wiped out in my early thirties by negative equity on property. Over the years I’ve helped Advisors and some of the big names in financial advice including Coutts, Hargreaves Landsdown, the four high street Banks, and countless local firms.  I’ve worked as an associate examiner at the Chartered Institute which sets and marks the level for exams which are now required for advisors to become authorised. I’ve worked as an Expert Witness on investment claims, negligence, and I’ve worked at some of major insurance companies, writing articles for trade press, I’ve set up a tax and technical team, worked on product developments, and I’ve seen the investment process literally from cradle to grave.

I’ve lectured advisors in the UK on investment, taxation, estate planning and financial planning, I’ve even lectured abroad to the life insurance association in Luxembourg and advisor conferences in the Czech Republic, the U.A.E., Belgium, Spain and Portugal.  But in recent years I’ve been brought in by advisors to meet with their clients and explain investments to them.  All of which makes me sound like one of the dullest people in the world you could run into!

So moving on then, why is it I’ve decided to set up these podcasts? Well one of the biggest reasons is I genuinely believe that if more people knew more about investment the wealth gap would be smaller. Over the last 10 years, we’ve seen a widening of the wealth gap, the rich seem to get richer and the less well-off have lagged behind.  One of the biggest causes of this was where people kept their money. The rich haven tended in that period to have more of their money in shares property whilst the less well-off have tended to keep their money safe in deposit accounts with banks and building societies and during the last 10 years we’ve seen interest rates and deposit accounts plummet to historic lows but during that same period the value of shares and property has rocketed. So why don’t people know more? Well I’ve already explained the internet really isn’t that helpful but I think there’s a lack of education at schools and universities and there’s also, I think a part to be played by the investment industry itself. There’s an awful lot of bullshit in this world and they create complexity which keeps you in the dark and forces you to rely on the experts. They’ve invented and entire language that makes the subject seem impenetrable. Phrases like alpha and beta and sharp ratios and acronyms by the bucket load, in fact Investopedia carries 19 pages of investment acronyms and that isn’t all.

I’d like to avoid that. In my work I’ve always tried to avoid jargon so one of my keys values is clearly going to try and keep this series as simple as possible.  If I don’t please do let me know .On the website there is a contact page so go to www.poundsshillingsandsense .com fill in the content page and let me have your feedback. I also think it’s important that given my objective is to try and narrow the wealth gap that as many people as possible find out about how to invest properly . In order to make that happen I’m going to undertake to never to charge for access to these podcasts. What I would like though is if you do think these podcasts are helpful that you share them with as wide an audience as possible. So if they’re helping you do tell friends, colleagues and family.

Another key value for me is that I’ve helped others to get much better off as a result of the information I’ve given them and I’d like now to help other causes that are less well known. So during these podcasts from time to time, not on every episode, I’d like to highlight the worthy causes , the first of these will be at the end of this episode.  Given that my objective with these podcasts is to help you to learn more about investment I’d like to cover off a number of topics and they will include in no particular order why you should save, how you can save money when you believe you can’t’, understanding the underlying assets that you can invest in, what to do about debt, how investments work, what to do with a windfall, how to spot when an investment is cheap or expensive,. Why it is that investment prices go up and down, what risk is and what you can do about it. And what kind of returns you can expect to see from different types of investments and then a little bit about what different types of investment products there are out there and how and when you should look to them.  But at this point I do want to make it clear I am not a financial adviser and this is not a financial advice website so if you do email in with questions I’m afraid I won’t be able to help you if what you’re looking for is a regulated financial advisor.

What I would hope though is that you will find out more about the sort of things you want to talk to you financial advisor about through this series of podcasts. And it’s really important to me during this series of podcasts that I am not influenced at all by the views of any sponsoring companies so I will not be taking any sponsorship from any investment advisors or advice providers.  There may be at times, in the future, adverts but that will be help to cover the costs of running the podcasts themselves.  But I do undertake that I will maintain editorial independence at all times.

So clearly I’ve got an idea as to what I’d like to cover but I’m not a slave to it. So if there are things you’d like to hear about again use the contact page on the website and let me know. And in time I’d like to be able to interview people and to broaden the structure of podcast out to provide some variety. So if you’d like to be involved in future broadcasts again get in touch and let me know.

So now how about that first lesson? Investment and speculation. Back in the very early days of my career people used to ask me Richard if you’re that good at investment why aren’t you a multi-millionaire and that was a question I never chose to respond to directly and the reason is that it stems from a belief that you should get rich quickly from investing and that is a fiction. The only way to get rich quick through investment is to take very high risk investment usually all or nothing and that will mean if you get it wrong you will lose all or nearly all of what you invested. That’s not investment that’s gambling, it’s just like the horses, the fruit machines or the casino its speculation and I will not be offering anything that gets you rich quick.

An example of speculation is Bitcoin or the other cryptocurrencies. About a year and a half ago I was meeting lots of people at seminars, roadshows and presentations and I was being asked continually what my views were on crypto currencies and I used to respond by making these series of statements and I’ll share them with you now. Bitcoin or other cryptocurrencies have no real intrinsic value, they are only really worth what someone pays you in the future in another currency to buy them from you.  Yes you can spend them, but usually with very high handling charges and the return is based entirely on someone in the future wanting to buy your Bitcoins from you at a higher price than you paid for them. 

In the early days of cryptocurrencies they were favoured by criminals as a form of money laundering.  Governments don’t like money laundering. The bank of international settlements, which is the central bank of central banks, has condemned their use and promised action against them. They are, effectively, electronic bearer-shares. A bearer-share is a piece of paper which can be cashed in for money by whoever has it in their hand. And in that sense a crypto currency is like online cash and simply having it sit on your hard drive doesn’t make it safe. Since that year and half ago Bitcoin has more than halved in value. If it sounds too good to be true it most always certainly is. And another lesson if you don’t fully understand what you’re about to invest in don’t invest in it.

So what is investment then? Well my definition is the considered use of money to gain a profit or income or both in the future. And different investments come with different risks and returns. Generally the longer you tie up your money the better the return you should get.   And you can see that illustrated by looking at deposit accounts. At the start of this year I checked and the following rates were available from the fixed rate accounts.  Over one year charters savings bank were offering 2.03% over 2 years it was slightly higher Investec being the best performer offering 2.35 % and then over 3 years ICICI bank offered 2.4% so the rate of return goes up the longer you invest, usually.

You also get more return for more risk buying shares for example over the longer term you would expect to receive higher returns than from deposits.  In the world of investments you should look to be rewarded for taking risks.  But isn’t that speculation or gambling? No you cannot lose all your money, not if you invest sensibly. Or let me put it another way, you have to work really hard to lose all your money investing in shares.

The stock market goes up and down every day. If you buy one share for one day that is speculation bit of a gamble I mean you could lose all your money if that one company goes bust and there are no assets to be distributed. But if you buy, say the top 100 shares and hold them for 10 years or more they’re not all going to go bust – well they might but what would the world look like then? RBS, HSBC, Lloyds, Barclays, they’ll all have gone bust with no value so you’d have to wonder who is going to be in the buildings to let you get your money out or to go and cash in your deposit account.  Shell and BP would have gone bust and no one wants their oil fields, their petrol stations or their offices.  Vodaphone would have gone and no one wants to take over their network.  Prudential, Legal and General have gone bust with no value despite having managing charges of billions and billions of pounds of investments.  Hopefully you’re getting the picture the whole world would have gone to hell in a hand cart and if you really believe that is a risk then there are four things that you should invest in and I’ll tell you about those just before the end of the episode.

What you’re aiming to do with investment is to get a better return than you currently get. Over time that could build up substantially and I’d like to share some numbers with you.  If you have £1000 in a building society today you might be getting as little as ½ % interest a year, that means in 10 years you would have £1,051 better than nothing but it’s hardly going to change your life. If you put that same sum into an account that pays 2% a year you would have £1219 – £168 more but if you invested it in assets that can give you a 7% return each year it would be worth £1967 , nearly double and right now those sorts of returns are achievable .

Albert Einstein the great scientist reportedly said ‘compound interest ‘is the eighth wonder of the world. He, who understands it, earns it. He, who doesn’t, pays it’.

In the coming episodes I’ll be explaining the different investments that are out there and what you need to know but next time I’ll be looking at why you should have a nest egg and how to build one up.  I did say a short while ago that during the course of these episodes I’d like to highlight some good causes. I’d like to mention the first of those, it’s Marys Meals . It’s Scottish based charity that feeds over 1.25m children every school day in the poorest countries of the world. They spend 93% of the donations they receive on those children, way above the average of major charities. The way they achieve that is by making extensive use of volunteers. The concept is that by feeding the children at school they offer the parents one less mouth to feed. Rather than the children having to go out to work to earn money to feed themselves, instead they get a chance of an education – one of the best ways out of poverty permanently. Check out Child 31 on YouTube.

What were the four investments you need if the world goes to hell in a handcart?

  1. An allotment
  2. A shovel
  3. Seed vegetables
  4. And a shotgun!

Episode 2

How and why to save

Great to have you back and I assume that you didn’t go out and buy the wheelbarrow, shovel, seed vegetables and shotgun. Thanks to those of you who got in touch with feedback and particularly to Colin for spotting a typo in the transcript on the website. One piece of feedback I want to deal with is that some people might not believe that these podcasts are free and editorially independent. All I can say is …they are. But perhaps the only way to find out is to keep listening and make your own mind up!

This episode is about why and how to save. I’m going to do the “why” first. There are two reasons, 1. to avoid the impact of the nasty things in life and 2. to have the life that you do want.  Some of what I am going to cover is going be a little glum to say the least. To make sure I don’t leave you feeling depressed at the end of this, I’ll leave the positive messages to the end – the ones about how to have the life you do want. I wish there was a better way of telling you the not so nice stuff but you need to hear it.

Everybody – even those who have absolutely no desire to be wealthy should be saving. The need for saving isn’t just about accumulating wealth; it’s about avoiding nasty shocks in life too. Those shocks can be both unexpected and expected. First the unexpected…

There is a better than one in three chance that you have not saved enough, in 2016 Shelter reported that 37% of households would be unable to cover their housing costs if one partner was out of work for more than a month. Housing costs are your rent or mortgage costs. The fact that so many people are a month away from not being able to cover those costs is shocking! It’s shocking because it means millions of people are taking big risks with their future, their security and probably their family’s security. It isn’t just losing your job or being off sick. If you are in a relationship that breaks down you will be in the same position. If you split up, one of you will stay in the home the other will have to move out but where will they find the money to rent a new place? Surfing sofas can only last so long and adding homelessness to the upheaval of a broken relationship? Well best to avoid it.

What actually happens if you can’t afford the rent/mortgage? Landlords usually try to be helpful but it depends on the landlord. Local authorities, housing associations and private landlords can be very different. Most importantly, non-payment of rent is grounds for eviction and you could be evicted within a few weeks – if you are concerned about this  right now then check out the Citizens Advice website for more information,  https://www.citizensadvice.org.uk/debt-and-money/help-with-debt/dealing-with-urgent-debts

If you own your home with a mortgage you will find that most banks and building societies will be pretty helpful if you are going through a tough time. But you must tell them as early as possible if you can’t make a payment.

Poverty is a major structural cause of homelessness and rough sleeping. Having a pot of money – enough for a deposit and a month’s rent would solve that! If you haven’t got that money saved and safely tucked away – you cannot afford a holiday…yet!

But there are steps you can take to avoid the problem

As a priority everyone should look to have three months money saved and easily accessible. In financial planning we recommend that this sum is in a bank or building society with immediate access. This is money you cannot ever afford to risk and cannot afford to tie up. You just night need to get your hands on it quickly one day.

Work out how much you spend every month – (it might be the same as how much you take home in pay each month) and then multiply by three. That is a pot of money you must only touch in the event of an emergency. So don’t touch it, unless there is an emergency – that is you lose your job, you’re off sick and not receiving enough sick pay. To be clear – a holiday, stag weekends, new TVs and Christmas presents are NOT emergencies!

When my son got a job I had a conversation with him where I told him everything I have just told you. In less than two years he’d saved up a three month emergency fund. A while later he moved  into his first flat. One week later he called me and said he might have to reapply for his job! With his nest egg behind him the news was nowhere near as stressful as it was for some of his colleagues. By the way – if you are employed consider unemployment insurance – £8 a month will get you £500 a month for a year if it happens, money well spent! If you are self-employed or your employer offers no sickness benefit, check out sickness and accident and permanent health insurance.

Hopefully you now recognise the need to have some money behind you. But how can you save when you are struggling to make ends meet? There are a lot of people who genuinely believe their bills and expenses mean there is always too much month and the end of their money. Perhaps you are thinking that the only way that is going to change is if you get a big pay rise.

But you are almost certainly spending money you don’t need to. There are two ways to deal with bills – cut them down or cut them out. Some bills you cannot do anything about, rent , mortgage, council tax, food but there are others you can tackle. As a priority in cutting bills down, look at energy, it is one of the big bills for most people – have you switched or looked at the savings that switching supplier can provide? I have switched 6 times and saved between £500 and £700 a year each time! https://www.uswitch.com/?ref=ppcgoogle~brand~000641~uswitch&gclid=Cj0KCQiAurjgBRCqARIsAD09sg8AFoG4qHJqPz7_1Ct1927ILjO-DjNT3lveMhWBhhkELGsA7tHCNCgaAsbHEALw_wcB

Other areas you can save are broadband and telephone, insurances and mobile phone contracts. Again check out uswitch – but bear in mind there are other comparison sites and sometimes they promote deals they get paid to promote!

But let’s assume you have done all that and still can’t find money to save? You might need to look at whether or not you are spending on things you don’t really need. These are the bills you need to cut out. Do you need the latest IPhone, tablet, laptop, taxi home, Uber Eats/Deliveroo/Just eat or pre-prepared meal? Martin Lewis of Money Saving Expert has written an excellent article on how to spend less available here,

https://www.moneysavingexpert.com/family/stop-spending-budgeting-tool/

Spending less is a habit you might need to work on. There are people on very low incomes who are managing to do it. The government announced a “Help to Save” account in 2016 for people on working tax credit and universal credit. It is early days but over 90,000 people have been able to save through the scheme. If you are not on one of these benefits you too should be able to save.

Next, avoid credit cards like the plague! Borrowing £1,000 on a card at 19.9% and paying it back at £50 a month will take two years to repay and cost a total of £1,201. In other words you will pay 20% more for whatever you bought just because you used a credit card and you won’t own it outright for 24 months.

If you saved up to buy it would take 20 months to own and you would be £201 better off. On top of that two things happen. First, because it is your money and not the bank/credit card companies’, you think differently about what you spend it on and how you spend it. Second, you start haggling for deals and shopping around – when it is your money. So instead of spending a £1,000 you might get the same thing for hundreds less. You’ll find you’re much more careful about overspending when it is your money you are using. When you think it isn’t your money… you’re more willing to spend it.

In the last episode I quoted Albert Einstein on compound interest it is “the eighth wonder of the world, he who understands it, earns it; he who doesn’t, pays it.” Don’t be on the wrong side of it, don’t use a credit card unless you are going to pay the debt off every month without fail.

I wish there were a cheerier way of giving you all this glum news. But before you think about investing you need an emergency fund.

Earlier I said that expected shocks happen as well as unexpected. The big one is retirement. People either put off thinking about it or believe that the state will pay them enough when they retire. Let me share some more depressing facts with you. A recent article by Which? reported that their average retired member spends £2,200 a month. Now that is probably higher than the national average but it is a figure you can benchmark yourself against. £2,200 a month is £507 a week. What will the state pension give you? £168 a week as a single person and £258 for a couple. Which? estimated that to retire on £26,600 a year you need nearly £250,000 in a pot of money. If you aren’t on track for that you have four options,

  1. Spend less in retirement
  2. Save more now
  3. Get a better return on your savings
  4. A mix of the three

At this point you might be thinking that I am a bit of a killjoy telling you to save and spend less! But it’s only taking a one-off step back so that you can move forward. It doesn’t mean never enjoying yourself, it means being sensible. Forgo a few things this year – get used to spending differently and make things easier for the rest of your life. Properly looking after your money means less worry, less stress, more peace of mind.

Now for the more positive part of the episode.

Last time I covered the difference between speculation and investment – how investment is about doing better with your money over the long term NOT about getting rich quick. In case you missed it or have forgotten here is a reminder…

£1000 invested at 7% a year will grow to nearly double over ten years. I want to look at what happens when you save regularly.  If you add £100 every month to the £1000 in the last example can you guess what you would have in ten years’ time? over £19,000.

But that is just over ten years. Let’s look at what happens when you look at even longer terms. Over twenty years instead of £19,000 you would have £55,000 and over thirty years £125,000.

So the longer you invest the bigger the benefit. Another way to turbo charge your savings is to increase the amount you save each year. As you get pay rises you should be able to afford to tuck away a little more. Increasing your monthly savings of £100 in the thirty year example by just 3% each year will provide a pot of money just shy of £170,000. 

Long term and sensible risk levels reap rewards! Or put another way – getting rich slow is better surer than getting rich quick.

Oh and of course – you have to resist the temptation to spend it all before you get there!!

Net time I will look at whether you should invest if you have debt. Is it better to pay off your loans or mortgages first? It will at the very least be more cheerful!!

Don’t forget that you can read the transcripts on the website or get in touch using the contact page at www.poundsshillingsandsense.com. Please if you think that what you have heard is worth sharing then please pass it on.

Catch you next time. But for now, if you think you can’t afford to save – think again, you can’t afford not to!