Money Management

Portfolio

OK so it’s time for HowToSaveCash to nail his colours to the mast and let you in on what the HTSC portfolio looks like. I’m going to update this page on a monthly basis as well as post monthly updates to show the progress the HTSC household is making on achieving their net worth goal. The portfolio will be in percentage values, as it makes absolutely no difference to you, dear reader, whether the HTSC goal is to have a net worth of £10, £100, £10,000, £100,000 or £1,000,000.

HTSC Portfolio – July 2018

Here’s a sexy pie chart which gives an overview of the portfolio.

Here’s the breakdown of what is in the portfolio.

Overall Percent
Cash 17
Stocks & Shares ISA  50
Fund Name Percent
Vanguard LifeStrategy 80% Equity  Fund – Accumulation 100
SIPP  25
Fund Name Percent
Vanguard LifeStrategy 100% Equity  Fund – Accumulation 100
Work Place Pension (Aviva) 6
Fund Name Percent
Aviva Pensions BlackRock Aquila UK Equity Index Tracker S6 20
Aviva Pensions BlackRock Aquila US Equity Index Tracker S6 45
Aviva Pensions BlackRock Aquila European Equity Index Tracker S6 20
Aviva Pensions BlackRock Aquila Pacific Rim Equity Index Tracker S6 5
Aviva Pensions BlackRock Aquila Japanese Equity Index Tracker S6 5
Aviva Pensions BlackRock Aquila Over 15 Years Gilt Index Tracker S6 5
BrewDog Shares 2

Notes 

The Aviva pension is an auto-enrollment work place pension that Mr HTSC was signed up for some time in 2016/2017. The funds in the pension are ones that have been manually selected since being enrolled. The default fund that was chosen was an actively managed, high fee fund which just doesn’t sit well with the ethos of saving cash, so it was changed for the 6 index funds listed above.

Yes, Mr HTSC invested in BrewDog some years ago and happens to benefit greatly from the discount received in their bars and online shop for being a share holder. Yes, I know, spending money on beer is not a basic need but hey, you have to live a little right? For those wanting to know more here’s a link Equity For Punks.

 

Ahh I’m drowning in ISAs

ISA (Individual Saving Account)

Up until about 5 years ago ISAs seemed pretty straight forward. There were 2 options (as far as I’m aware), there was either a Cash ISA, which your local bank or building society would offer or a Stocks and Shares ISA, which would be offered by brokerages. However, over the last 5 years it appears these ISAs have multiplied like rabbits and now it feels like untangling a bowl full of spaghetti when attempting to figure out which ISA right for what job.

Well if the conundrum of which ISA to open or contribute to this tax year has been keeping you up at night (and I’m taking a wild guess that it probably hasn’t), then don’t worry, we’ll go over what is currently available and when which ISA is best for what job. Now come on, together, we’ll get through this.

ISA Advantages

At the moment it’s simple, any gains on the money within an ISA (sometimes also referred to as a tax-wrapper, this isn’t someone who raps about tax) are currently protected from the tax man. There are other advantages which we’ll go over in the table below.

ISA Type Restrictions Best For Yearly Limit Benefits
Cash ISA Building up cash savings. 20,000 Interest earned on savings is not taxed.
Lifetime ISA Can only withdraw money for house purchase or retirement.

If using this for retirement savings, money cannot be withdrawn until age 60.

Saving for a house or retirement. 4,000 Government tops up amount by 25%. So you put in £4,000 and the Government will add £1,000.

 

Help to Buy ISA Can only be used for buying your first home. Saving for a house deposit.

2,400*

Maximum of £200 per month contributions.

In the first month of opening you can deposit £1,200.

The Government will top up the ISA when the ISA is closed for purchasing a house. The government top up by 25% of what is in the ISA up to a maximum of £3,000.
Stocks and Shares ISA Building up a shares/bonds/funds portfolio. 20,000 Any gains in value of shares or bonds are tax free. As are the dividends or interest which is paid to you.
Innovative Finance ISA Peer-to-peer lending 20,000 The money earned from peer-to-peer lending is tax free.

 

Scenario: Saving for a house

So you’ve got two options here, either the Lifetime ISA or the Help to Buy ISA, which is going to be best for you? Well you’re reading a HTSC post so we’ll get to the example.

Assumptions

  • Saving for 3 years (36 months)
  • Maximum contributions are made
ISA Type Contributions Total Contributions Bonus Total
Help to Buy ISA 1,200 x 1 Month

200 x 35 Months

8,200 2,050 10,250
Lifetime ISA 4000 each tax year 12,000 3,000 15,000

If maximum contributions can be made, the Lifetime ISA is the one to go with and even if you cannot make the maximum, it’s still the Lifetime ISA and here’s why. The Lifetime ISA has an age limit of 50 for when the 25% bonus stops being paid, where as the Help to Buy ISA will only pay a maximum bonus of £3,000. So there’s no point in saving into the Help to Buy ISA once you’ve saved £12,000.

If you open a Lifetime ISA and contribute the same as you would have if you opened a Help to Buy ISA, the bonus and total will be the same. It’s just the Lifetime ISA allows you to save more and in turn earn a bigger top up.

 

Scenario: I’ve budgeted like a pro and I’m sat on spare cash I want to get to work

So you’re not happy with the Cash ISA return (of a pitiful 1%) and you’re happy to take on a little more excitement (read risk) in the hope of greater returns.

Now the Stocks and Shares ISA and the Innovative Finance ISA are not directly comparable as they are out there to satisfy different needs but here’s a quick rundown.

ISA Type Pros Cons
Stocks and Shares ISA Any gains in the value of shares and bonds bought is tax free.

Any dividends or interest paid is tax free.

There is an ongoing fee for having a Stocks and Shares ISA.
Innovative Finance ISA Any money received from peer-to-peer lending activities is tax free. There is an ongoing fee for having an Innovative Finance ISA.

Not many platforms currently offer this ISA.

The Innovative Finance ISA is the new kid on the block and it’s out there to satisfy the growing demand of people wanting to loan out their spare cash to other people or businesses. This is known as peer-to-peer lending or crowd funding. More information can be found here: MoneySavingExport – Peer-to-peer lending

There are not a lot of platforms out there that offer the Innovative Finance ISA but one list I’ve found is: https://innovativefinanceisa.org.uk/isa-providers/ 

So I hope that clears a few bits and pieces up and you’re able to determine which ISA is best for you. I’m sure in years to come there will be even more ISA options out there, which will no doubt add to the confusion but don’t be afraid, as we’ll tackle each ISA as it is released into the wild.

As always, please do further reading when it comes to finance. The topic of ISAs is a large one and cannot be fully understood by reading one blog post by a guy on the internet. Happy hunting!

Buying a house – The dreaded mortgage

The chances are, the biggest loan you’re ever going to have is a mortgage and that prospect puts many people off even attempting to do their own research and selecting a mortgage that’s right for them.

DIY

When looking for a mortgage the most important thing to remember is that what you’re after is essentially a big loan. Unfortunately, as it’s a financial product, there is some jargon involved which I’ll cover as we go on.

There are 4 important factors to take into account when looking for a mortgage:

  • Amount you want to borrow
  • Length of mortgage
  • Interest rate
  • Fees

Amount – This is pretty simple. The more deposit you have the smaller the mortgage, which in the long run is a win for you. So apart from saving more for the deposit, there isn’t much more we can do here.

Mortgage Length – This is going to depend on your situation. The shorter the mortgage length, the more your monthly payments are going to be, however in the long run you’re going to have paid less interest on the loan. Meaning you’ll be better off sooner. Now depending on the mortgage provider, they may allow over payments, which gives you the flexibility of over paying when it suits you. Overpaying will also shorten the mortgage length. Mortgage providers tend to gloss over any overpayment allowances/restrictions, this is because they don’t want you to pay it off any sooner but it’s definitely worth knowing this information.

Interest Rate – Each mortgage provider is going to be vying for your custom, so be on the lookout for a competitive interest rate. Now it’s important to understand it’s not just a case of going with the cheapest rate as there might be steep application/booking fees with the mortgage, which could mean you would be better off getting a slightly higher interest rate and smaller or no fees.

Fees – It would appear each provider uses its own terminology when it comes to fees but two of the main ones I’ve seen are booking fee and/or application fee. In my opinion, you should be able to get a perfectly good deal without paying any fees at all. You just have to do a little digging.

The MoneySavingExpert has a great first time buyers guide which breaks down the fees which may be applied.

Ok, enough babble, example time.

Scenario

Mortgage Required £150,000
House Value £170,000
Mortgage Length 25 Years
Mortgage Type 2 Years fixed interest rate

Using the excellent MoneySavingExpert mortgage comparison tool, it’s come up with two mortgages which look similar but have a very big difference.

The initial interest rate on offer is nearly the same 1.90% vs 1.93% (this is the interest rate you’ll be paying on the loan for the first two years) and the monthly mortgage payments are similar £628 vs £630. However, there is over a £10,000 difference in the total amount payable (highlighted in the red boxes). This is down to the fact that after the 2 years, the mortgage provider will put you onto their Standard Variable Rate (SVR), which is usually much higher than the rate you first get. The SVR for the first mortgage is 5.49% vs 4.99% on the second mortgage. Now, 0.5% doesn’t sound like a lot but over the 23 years you’ll be paying back the mortgage, as we’ve seen, it will add up to over £10,000 more being paid for the same mortgage. I don’t know about you but I’d definitely prefer that £10,000 stay in my pocket rather than someone else’s.

Now in reality after the 2 years you should be looking around to see what mortgage providers are offering for another fixed term. Invariably, these interest rates will be cheaper than the SVR so it’s a must do when your fixed term comes to an end.

This example uses just the one online tool. However, make sure you use a number of online tools as not one tool will cover all the mortgage providers out there.

You might be wondering, hey, just above you mentioned something about fee free mortgages, where do I get one of those? One provider that has them is HSBC, using the same details as above, HSBC’s online mortgage comparison tool presented this mortgage:

As we can see, the initial interest rate is higher than the 2 previous mortgages at 2.34% however the SVR you get put on after 2 years is 3.94%. That is significantly lower than the first two we looked at which were 5.49% and 4.99% respectively. So in the long run, your total amount payable would be much lower with the mortgage from HSBC. This mortgage doesn’t have any fees either compared to the £1,414 and £999 set-up fees of the previous two mortgages.

As always, do your own research and calculations when it comes to this as everyone’s situation is different.

Mortgage Advisor

Now I’m not saying that a mortgage advisor isn’t worth it, if the above scares you then don’t feel silly about arranging to use one. I know many people who have had one and they have been very happy with the service they have received and the mortgage they have ended up with.

The first question you’ll want answered is how is this advisor making a living? Some brokers charge a flat fee to find you a mortgage, some charge a percentage of the mortgage value (avoid at all costs, the paperwork for filling out a mortgage cannot be that much different when wanting £100,000 or £300,000) and some don’t charge a fee. Those that don’t charge a fee tend to get a kickback from the mortgage provider for sending the business their way.

They will all no doubt advertise they search the entire market but I highly doubt they do. Admittedly there are mortgages that can only be obtained with the use of a broker but having seen the interest rates on offer direct from mortgage providers, I highly doubt a broker can do much better in terms of the initial interest rate and fees.

I’m hoping you’ve found this useful and it’s given you the confidence to go off and do more of your own research and to select a mortgage that’s right for you (not your broker). I’m also hopeful that in the long run, this will help keep more of your hard earned cash in your pocket.

Our next stop will see us look at the solicitor/conveyancer fees that come with a house purchase.

Investing – Keeping an eye on fees

One of only a few variables you can control when making your spare cash work harder is fees. Unfortunately fees come in all shapes and sizes when looking at brokerages and funds. So I’m going to keep it simple and go over brokerage fees in this post.

Rule One: Keep fees to a minimum

Rule Two: Don’t forget rule one.

Brokerages are split into 2 camps when it comes to charging fees. Some charge a flat fee per quarter or year and some charge you a percentage of your portfolio value.

As for which broker you should use, generally, if you do not see your investment stash being worth more than £40,000 in the next 4/5 years then go with a percentage fee broker. If you see your investment portfolio value rapidly increasing it may be worth going with a flat fee broker straight away.

Platform Fee Example

We’ll use a portfolio value of £10,000 for the following examples. The examples will include the cost of 12 fund purchases over 1 year.

Hargreaves Lansdown (Percentage)

Here’s what Hargreaves Lansdown are currently offering when it when comes to their Stocks & Shares ISA charges: HL Fees

HL

Calculate annual fee: £10,000 x 0.0045 = £45

Total Annual Cost: £45

There are no dealing fees when dealing funds on HL so a monthly fee is all you will be paying. Just divide that annual amount by 12 for the monthly cost.

Lloyds Bank Share Dealing (Flat Fee)

Here’s what Lloyd’s are offering on their Stocks & Shares ISA: Lloyds Bank

lloyds

Annual fee: £40

Fund dealing charge: £1.50

Annual dealing fee: £1.50 x 12 = £18

Total Annual Cost: £58

As you can see, the percentage broker is the cheapest when the portfolio is worth £10,000. However, if you do the same calculations with a portfolio worth £40,000, the flat fee broker is the cheapest option.

Here’s a very simple breakdown of the fees that you should be mindful of when choosing a broker:

  • Brokerage platform fee (is it a percentage or flat fee)
  • Dealing fees (some platforms don’t charge for dealing funds but do individual stocks)
  • Exit fees

As always Monevator has done an exceedingly good job of taking the hard work out of choosing a broker: Monevator Compare Broker Table

 

Investing – Index Trackers

Hopefully you haven’t lost the will to live and you’re super excited about the prospect of your spare cash working hard for you. In a previous post I explained what a stock and a bond was.

First things first, what’s an index? You may or may not have heard of the ‘FTSE 100’. This is an index that is based in the UK and it’s a group of the UK’s top 100 companies based on market capitalisation (no worries if you don’t know what this means, here’s a nice explanation: Market Capitalisation ).

A list of the companies in the FTSE 100 can be found here: FTSE 100

As the previous blog post explained. Investing in just one company is as risky as it gets when buying stocks (unless you can set aside a large proportion of your time researching the company and I’m talking about analysing annual reports, investigating the company’s industry and what economic and global factors could affect the company’s profits in the future) and for the majority of investors like you and me, being able to spread our hard earned cash over many companies is probably the best way to go.

This is where index trackers come in. Instead of buying 1 company’s stock, you have the option to buy all 100 companies in one go by purchasing a unit from a fund.

Fund Basics

  • Funds sell units (not stocks).
  • Each unit is made up of the value of the group of stocks from the index that it’s tracking
  • There are 2 varieties of units
    • Income – These pay out distributions directly to you
    • Accumulation – These use the dividends paid by the companies in the index to buy more stocks on your behalf

A more in depth look at the different between income and accumulation units can be found here: Income vs Accumulation

Here’s a quick run down of looking at a fund’s page: Vanguard FTSE 100 Index

  1. This tells us that this tracker follows the FTSE 100 index and it’s the unit type of income
  2. This is the cost of 1 unit (you don’t have to buy them in whole units). The ‘Change’ tells us the change in price from the previous day
  3. This is the number of stocks that unit price comprises of
  4. This is the Ongoing Charge Figure. More on fees later
  5. How risky the unit is out of 7. 1 being the least riskiest and 7 being the riskiest

Here’s an example of why buying a unit from an index tracker fund trumps buying an individual stock:

Investor A buys 10 shares in Company A.

Company A’s shares will fluctuate on a daily basis and in the worst case scenario the company may eventually go bankrupt, in which case investor A loses all of his cash.

Investor B buys 10 units in a FTSE 100 index tracker

The index tracker unit price is going to fluctuate on a daily basis, however unlike investor A, if a company in the FTSE 100 was to go bust, the unit price will drop but the investor is still invested in 99 other companies. The only way investor B would lose his money is if all the businesses in the FTSE 100 went bust.

Units do pay out distributions (much like stocks paying dividends). When these are depends on the fund but you should be able to see from a funds website, how often it distributes money to its unit holders.

As well as stocks, you can invest in bond funds too. Another example is Vanguard’s UK Government Bond Index Fund. This fund buys Government bonds of varying lengths of maturity.

Now you might be thinking. Great! I don’t have to put all my spare cash in one company, I can buy an index tracker unit and effectively buy into 100 different companies. Plus, if I don’t fancy too much risk with companies, I can buy a unit in a Government bonds index tracker because hey, when did the Government last go bust?

Fantastic, now your on board with index tracking, there is just one last bit I want to show you. There are many stock market indexes around the world. The S&P 500 (US), Nikkei 225 (Hong Kong) and FTSE All Share (London) are just a few.

Now what if there was a fund out there that followed all these different indexes, so not only was your spare cash invested in many companies but these companies were all over the globe. Well there are and one of the cheapest funds you can purchase is from Vanguard: Vanguard LifeStrategy 100% Equity

If you take a look at the portfolio data tab, you’ll see this is actually a fund of funds, which is giving you global diversification. Just think, when you’re sleeping, your cash is still working away.

They also do a whole bunch of other funds which are split between a globally diversified portfolio and Government/Corporate bonds, Vanguard calls these LifeStrategy funds.

I personally have chosen to buy the Vanguard LifeStrategy 80% Equity fund. This means that if you were to invest £100, £80 of that would be used to be stocks and £20 would be used to buy Government/Corporate bonds.

I’m hoping this hasn’t been too overwhelming. There will be future posts on fees (which is a hotly debated topic in the finance industry) and tax efficient wrappers (I’m talking about the beauty of ISAs and the SIPP, Self Invested Personal Pension)

If this has only left you wanting more then welcome to the club!

Just a practical note here. Please, please do further reading if this is the first blog you’ve come across on this subject. It’s by no means certain that you’re money will go up over time and that you won’t lose all that you invest. However, I’m of the opinion that unless global capitalism fails spectacularly, I think investing in index trackers is about as good a break as you’re going to get in investing.

Making Your Spare Cash Work Harder

So all that hard work has paid off. The SSBS has done its job and now you find yourself with some extra cash lying around and you’re not sure what to do with it. Well you have a number of options, one of those is lending it to the Government or companies (known as buying bonds) or buying a stake in a company (known as buying stocks).

I’m reluctant to use the word ‘investing’, purely because it instantly brings up images of gambling and people like Jordon Belfort.

I want to make this as clear as possible. With a little effort (and I’m talking about doing a small amount of reading) you will realise that the term ‘investing’ isn’t the big scary complicated monster, you may think it is. Investing does not have to the equivalent of putting all your money on black at the roulette table and waving goodbye to your hard earned cash.

I’m going to quickly talk about 2 of the most widely bought asset classes, stocks and bonds. No problem if you’re unsure what an ‘asset class’ is, here’s a nice explanation: Asset Class. I’m going to keep it short in the hope you don’t lose interest, so please bare with it, you’ll be glad you did when you’re done.

Bonds

First off, what is a bond and why would I buy these with my spare cash? Put simply a bond is a loan from you to the Government or company. The Government or company will put a price and time frame (known as maturity) on the life of the bond and a rate of interest (known as a coupon) you will earn for loaning them your cash. Once the time frame is up on the bond (it hits maturity) you get the cash back that you paid for the bond. For example:

Company A are offering a 5 year bond with a 5% coupon for £100. So the math plays out like so.

You buy 1 bond for £100.

Every year you’ll earn 5% interest on the £100. So 100 * 0.05 = £5

After 5 years you will get your £100 cash back and have earnt £5 (interest earnt per year) * 5 (number of years) which is £25. Which gives you a grand total of £125.

Government bonds are considered safer than company bonds because the Government isn’t likely to go bust anytime soon. However, because of the relative safety of your cash, the interest rate the Government offers is usually much lower.

How do I buy bonds?

Buying individual Government bonds can be done via the NS&I website.

As for buying company bonds. You will have to investigate this yourself as I’ve never bought a company bond directly. However, it’s not going to be any more complicated than buying a bond from the Government.

Stocks (also known as equities)

What is a stock and why would I buy these with my spare cash? A stock is you buying a stake in a company and in return for buying a stake in the company, you will be entitled to regular payouts known as dividends.

Similar to bonds paying interest, stocks pay out dividends. Dividends come from the companies profits and it’s a sort of thank you from the company to the shareholder for taking the risk and buying a stake in that company. The biggest difference between bond interest and a stock dividends is, a company does not have to pay its shareholders dividends. Companies set when a dividend is paid, so a company may decide on paying a dividend every 3 months, every 6 months or once a year. It all depends on the company as to when this happens.

As well as the dividends the stock price may increase or decrease overtime. Ideally you’ll want the stock price to increase but this is not a guarantee. A stock price may increase or decrease for many, many reasons. Imagine you buy stocks in a pharmaceutical company and they find a cure for a widespread disease and they are the only company that can produce the drug. Based on this information, the company is likely to be more profitable in the future due to the research breakthrough and so the stock price will likely increase. However, this works both ways, the company may be trialing a drug and the results come back as it’s no better than a placebo. This would then likely cause the stock price to fall as the company’s profits may not be as high in the future due to the new drug not being a success.

How do I buy stocks?

You buy stocks through a ‘brokerage’. A brokerage is the middleman between you and the company you want to buy stocks for. They will handle all the complexities of buying the stock upon your instruction. For this they charge for each transaction. They will also charge a fee for holding the stock for you. This is usually a percentage of the total value of your stock portfolio (read that as the total value of all the stocks you own).

Monevator has done an absolutely outstanding job of comparing online brokers for UK investors: Compare the UKs cheapest brokers

Conclusion

If you’re now a little pissed because you’ve just spent a good 10 minutes reading this and although it all sounds like a good idea, it’s still confusing and seems risky, then don’t worry. You’re right to think it’s risky. Investing in bonds and stocks like this is about as risky as it gets. Now you may be thinking, OK, so I was right about it being risky, how do I reduce the risk but still take part so my spare cash works harder for me? Well, you’re going to love the next installment on this. It’s called indexing and it comes with some massive advantages for the average investor like you and me. It’s the equivalent of putting the eggs you own in many, many baskets without needing to think about it too much.

 

Saving

So you want to increase the amount of cash you’re saving each month. The quickest way to achieve this is by cutting down on your spending. It’s as simple as that. The tricky part is knowing which bits of your spending to cut down on.

In the example SSBS you’ll see in the outgoing column items you may be familiar with. Just in case you can’t remember, here it is again.

The easiest way to see what could be chopped off your monthly spending is by prioritising what you need to live and go from there. So my approach would be to start with the basics and work your way back.

The Basics

  • Mortgage/Rent
  •  Utility
    • Electric
    • Gas
    • Water
  • Council Tax
  • Food
  • Phone line/Internet

Now, ‘The Basics’ are going to different for different people. You may decide that your mobile phone or contact lenses are items that you cannot do without and that’s fine. For me, anything that comes after the above is a luxury and the cost should be watched like a hawk, if not cut out all together.

So going back to the SSBS example. One outgoing that I would certainly consider ditching is Sky TV. By cancelling Sky TV you’re already able to save £50 per month without making any other lifestyle changes. Over 12 months, that’s £600!

If I’m about to make a monthly commitment for the foreseeable future, the quickest way to decide whether it’s worth it for me is to times the monthly amount by 12.

For example:

Product Monthly Cost Annual Cost
Amazon Prime £7.99 £95.88
Netflix Premium £8.99 £107.88
Total £16.98 £203.76

The yearly total on these two services would be £203.76. Now to me, I would prefer to have saved that £203.76. However, if you’re a film/TV buff and enjoy these services, that’s fine. So long as you are aware of the potential savings that can be made by cutting out the non-basics from your outgoings.

So now you’ve reviewed your outgoings and are happy that you’re saving enough but you may be saying to yourself ‘but what am I saving for?’. For me, it’s piece of mind. Having a cash pile in the bank will reduce those anxiety inducing situations like having a car problem or needing to replace a boiler at home. A savings target of between 6 to 12 months of your take home monthly salary will put you in a very comfortable position.

There are many, many more ways in which to reduce your monthly outgoings. If for example you commute to work by car with a journey that is less than 4 miles and you live in a town or city, consider cycling or taking the bus. If you happen to live in a very expensive part of a town/city. Considering moving to a cheaper part or closer to work in order to reduce those commuting costs. Cook more at home instead of eating out. Cook larger portions of food when you do cook so you can take them to work instead of buying lunch. Get into the habit of multiplying the cost by the number of times you do it. Last example, I promise. Lunch at the sandwich shop each working day of the week.

Lunch £5

£5 x 5 (Monday – Friday) = £25

£25 x 4 (roughly the number of weeks in a month) = £100

And just to hit this home £100 x 12 (yep, the number of months in a year) = £1200.

Now is that shop bought lunch really worth 1200 of your hard earned pounds? O.k admittedly this is extreme but I’m hoping it’s helping with demonstrating where you can save and how even saving small amounts can have a big reward.

Fantastic, so now you’re budgeting like a pro, the debts going or gone, the non basic outgoings have been exterminated and you’re on your way to having a nice pile of cash just smiling at you when you check your bank account. You may be wondering what happens when you’ve hit your saving target, well I’m glad you asked. Up next we will look at what you can do with this extra cash to make it do more than just smile at you from your bank account.

High Interest Debt (Credit Cards / Payday Loans)

So hopefully you’ve got your SSBS filled out and you have come to the conclusion that something has to be done to increase the amount of cash left over each month. You may be unsure on where to start cutting back in order to achieve this.

If you have outstanding credit card / payday loan debt and only pay off the minimum each month. This is where you start. Simple.

Credit card and payday loan debt is one of the most expensive ways to loan money. Interest rates can go into the 1000s of percent. The quicker you pay this debt off the less interest you will pay on the outstanding amount, which means more cash in your pocket in the long run. Even if you can’t clear the balance this month or next. Throw whatever you can at it in order to clear it as soon as possible. Don’t be tempted to take out another loan to pay off a different loan. Keep things simple and just reduce the debt to 0 as soon as possible.

Here’s a quick example. The loan below is on offer from a well known payday loan company and it’s offering to take nearly double the amount of money off you, than you actually want.

For a loan of £600, over a 6 month repayment period. It will cost you a total of £1138.29. The total you are paying back is nearly double what was borrowed in the first place.

The ideal approach to this is, you use the SSBS to budget and save for that £600 purchase. The bonus being you then go on to keep the other £600 that nearly ended up in someone else’s pocket.

Credit cards can be just as bad although interest rates are usually lower. My advice is simple. Clear this debt as soon as possible. However, if you happen experience some kind of strange satisfaction from using credit cards, then make sure the balance is paid off in full each month.

A positive note on credit cards. Credit cards can be handy and do come with an advantage which I’m sure many people do not know about. It’s know as the ‘Consumer Credit Act’ and it basically means that the credit card company it just as responsible for the quality of items or services purchased than the seller. So credit cards can be useful when making expensive purchases and want an extra level of protection, as you can put in a claim to the credit card company and seller if something was not up to standard. If the credit card company agrees with you and pays out, then they will go on to recoup their costs from the seller.

A further in depth look at this can be found on the Which website Section 75 of the Consumer Credit Act

Great! So you’ve now got a live and kicking SSBS, the credit card / payday loan debt is being wiped out as we speak, so what now? Saving. There is always room for more saving.

I NEED HELP WITH MY MONEY! Said no one, ever.

The majority of people in Britain are not comfortable with talking about money and that is fine. However, this becomes a problem when financial difficulty strikes and it feels like you have no where to go. Unfortunately, there are many companies out there which are more than happy to help you get out of trouble. Credit card companies and payday loan companies to name a few. Sadly, these guys are not out there to help you in the long run, they are there to make money and they are preying on the vulnerable in order to do so.

If this happens to be you, do not worry, with some effort and careful planning, the days of being short of cash will be a distant past.

To keep the blog posts small, this is just an introduction to a series of posts which will contain simple steps that will hopefully help you to get into a healthy financial position.

Upcoming posts:

  1. A simple budget
  2. Clearing high interest debt (credit cards / payday loans)
  3. Saving
  4. Making your spare cash work harder (Investing)

A Simple Budget

Knowing that more money is coming in than going out each month requires writing it down and seeing in black and white, if this is the case.

If a little effort is put in at the beginning you should not have to alter it much after that. Although this depends on how complicated your finances happen to be.

A budget can be as simple or as complex as you like. Here’s a simple spreadsheet to get you going. Feel free to download the Excel version and add in your information. This does not have to be done on the computer. A pen and a piece of A4 will do the trick.

Great, a spreadsheet but what do I do with it?

Add all of your the incoming payments (usually salaries) under the ‘Incoming’ heading. I realise your monthly salary may not be the same each month. If this is the case then average it out over the last 3 to 12 months.

Add all of your outgoings under the ‘Outgoing’ heading. This should include all standing orders, direct debits, rent, mortgage and so on. Anything that is setup to come out of your bank account automatically. If you pay for items yearly, then divide the yearly cost by 12.

The basics are going to be rent/mortgage, utility bills and food. Food is a difficult one of budget for. If you shop weekly, look at the bills over the past 4 weeks (if you pay by card, it’ll be on a bank statement) and add that total to the spreadsheet.

The ‘Total Incoming – Total Outgoing’ number at the top is how much money is left after taking all of the outgoings off your salary. Now this can be the scariest bit. Either realising that this is not as high as you would like or that it is a negative value.

Even if it doesn’t look too rosy at the moment, CONGRATULATIONS! This is probably the most important step in wanting to achieve any financial goal, whether that is getting out of debt or saving for a house. Now you’ve got an accurate picture of your finances. You can go on and plan your future. Well done!

You may be surprised to know that it’s this simple. There is no black magic, no golden bullet. Just numbers. Either on a screen or written down. I bet this chap wishes he’d gone through this exercise.

Next up we will look at high interest debt (credit card/payday loans) and why this should be tackled first when managing your money.