The Way to Wealth (9 page)
Authors: Steve Shipside
For all that Franklin talked about working hard he was explicit about the fact that hard work alone does not necessarily mean wealth. ‘A man may, if he knows not how to save as he gets, keep his nose all his life to the grindstone, and die not worth a groat at last.’
Learn to save your groats, and buy your nose a break from that grindstone.
DEFINING IDEA
…Blessed are the young, for they shall inherit the national debt.
~
HERBERT HOOVER, ON WHY YOU NEED TO PROTECT YOUR EARNINGS FROM TAX
Savings often seem like a luxury that you simply can’t afford. It’s hard enough to find the money to get by, let alone the money to put by. But that’s a false economy because your regular outgoings are only part of the story and sooner or later you’re going to be on the receiving end of a far larger demand. Savings are also a way of taking a firm grip on outgoings and showing them who’s boss. Holidays, for example, often swallow all your available cash (but hey, you deserve it, right?) and stop you making any further savings, but if you take it just a bit easy this year you could put the money saved aside for next year’s holiday. That way you have a year to profit from the rising interest rates and add that extra sum to your holiday spend—and tax free if you’re smart about it.
Don’t underestimate the importance of ensuring savings are tax free, either. If you’re in the UK and paying tax at the higher (40%) rate then £9,000 will earn £495 in interest over a year at a rate of 5.5%. The same sum in a savings account paying the same rate would only earn £297 after tax. The easiest way of (legally) dodging the tax is to use ISAs (Individual Savings Accounts) which allow a limited sum to be stashed away every year without incurring tax and without it even being declared on tax returns. Do be careful if you intend to use that cash in the next year or so, however. The ISAs offered by major UK banks are sometimes postal accounts which means that while you could theoretically take out money whenever you need it, you won’t get your hands on it half as fast as you would with an online ISA.
Now, if you used to be confused about all that mini/maxi ISA stuff then you’ll be glad to know that ISAs have been simplified so that from now on (the 2008/9 tax year) the annual maximum you can put into an ISA rises from £3,000 to £3,600. You can also hold shares under an equity ISA to bring your total tax-free ISA value up to £7,200 a year. You don’t pay tax on the dividend payments if the shares are held in an ISA and again you don’t have to bother with all that fiddly declaration stuff on your tax return.
HERE’S AN IDEA FOR YOU
…In the UK, different banks offer better ISA deals but they traditionally haven’t allowed transfers. Close an old ISA to remove the cash and it loses ISA status so you’re locked in. This may be changing—check out Icesave, an Icelandic provider which is shaking up the market by targeting transfers from high street banks.
‘If you would be wealthy think of saving as well as of getting,’
says Franklin. While he clearly advocates saving he adds a subtle point that modern savers would be wise to heed:
‘the Indies have not made Spain rich, because her outgoes are greater than her incomes.’
DEFINING IDEA
…People working in the private sector should try to save money. There remains the possibility that it may someday be valuable again.
~
NORMAN R. AUGUSTINE, US AEROSPACE BOSS AND AUTHOR OF AUGUSTINE’S LAWS
Outgoings exceeding incomings is an obvious recipe for financial disaster, but often we simply don’t see that this is what’s happening to us because we are blinded by names. It’s only human, after all, to think that any money put into a savings account counts as savings. That’s often not the case, however, since many of us have money in savings accounts that we virtuously refuse to raid while still running up credit card debts that are being charged at up to five times the APR of our savings. In that case a savings account is nothing of the kind—it’s really a losings account.
Clearly, then, the first step towards saving is to pay off any debts that aren’t being lent at a true 0% interest rate. That’s a hard bullet to bite because it means that your savings disappear instantly into the pit of your outgoings, but without overcoming that psychological hurdle you’ll never claw your way back into real profit.
The next step is to take a long hard look at your savings account and what it really offers. There are two main ways in which savings end up as outgoings and they can both be avoided. The first is tax. If your money isn’t protected by some kind of tax-free umbrella then any interest it earns will count as taxable income.
If you still think a savings account is the way to go, or if you have already reached your tax-free limit for a given year, then make sure that it is at the highest rate possible to minimise the thieving of the second great savings stealer—inflation. Remember that when hunting for great rates, the worst place to look is almost certainly your own bank. Banks tend to reward loyal customers by doing the dirty on them when they’re not looking. They rarely offer the best deals because they don’t have to—they have a semi-captive audience of existing customers who use them for savings accounts and other financial products because that seems easiest.
Don’t let inertia steal your precious savings; shop around and be prepared to be adventurous because the best offers are usually from places you haven’t heard of. For example, in the UK at the time of writing the best deal is a savings account from Kaupthing Edge. Who?! Precisely. Unless you’re a fan of Icelandic finance, Kaupthing Edge has probably passed you by. It’s signed up to the UK Banking Code, though, so if it disappeared tomorrow up to £35,000 of your savings would be safe.
HERE’S AN IDEA FOR YOU
…The best deal available at any one time varies from month to month so be prepared to move your money at any time to make the most of it (introductory offers often end after a fixed period). To save surfing all the bank websites, use comparison agents.
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DON’T GET BOGGED DOWN IN THE BAD TIMES
Everyone knows the saying ‘fail to plan and you are planning to fail’ but when times get tough it can be easy to forget to plan for better periods to come. Or, as Franklin put it,
‘remember Job suffered, and was afterwards prosperous’.
DEFINING IDEA
…Debt is the slavery of the free.
~
PUBLILIUS SYRUS, ROMAN AUTHOR—JUST AS TRUE TODAY AS IN THE FIRST CENTURY B.C.
You don’t actually have to endure a plague of boils to feel like the blues have got you and there’s no way out. The realisation that you’re in debt, that it’s rising and you have no visible way of paying it off will usually do the trick. The good news is that there is always help on hand and there are ways out. The bad news is that some short-term solutions can actually turn out to be long-term nightmares that will seriously damage your future success. In particular, beware of Individual Voluntary Arrangements (IVAs) if you’re in the UK.
You’ve probably seen adverts for IVAs on the TV. They tend heavily towards imagery of those drowning in debt or being locked in until miraculously they are freed of all their constraints and their debts just go away. In reality an IVA is a formal agreement between debtors and creditors where debts are frozen. Instead the debtor pays off a fixed sum every month for a fixed period (often five years). If the debtor honours that commitment, the rest of the debt is written off after that point. Sounds great, and IVAs were originally introduced as an alternative to the stigma of bankruptcy. Anyone who owes at least £15,000 to three or more creditors can arrange an IVA—but what is often forgotten is that an IVA is also a financial product being offered by agencies who take a healthy profit and thus have a vested interest in selling you that option.
IVAs are very attractive to those who feel swamped by debt because it means instant protection from creditors who no longer contact you, it provides protection from court action, and is not published in the local paper (unlike bankruptcy). Furthermore you can continue to have a current account (unlike bankruptcy), continue to trade as a business and you aren’t disqualified from work in the financial sector. So what’s not to like?
Well, for a start that IVA will typically stay on your credit record for six years (bankruptcy is just one) which may seem a small price to pay until you consider that your chances of getting business loans, overdrafts or a mortgage during that time are slim—to put it mildly. IVAs may be more discreet than bankruptcy but they typically last five times longer, are still recorded on a publicly searchable record and will be automatically converted to bankruptcy if you default. Do you really want to handcuff your potential to grow and raise money for that long in order to get out of a temporary scrape?
HERE’S AN IDEA FOR YOU
…Don’t go to the private sector first for help getting out of a hole. Your interests are not necessarily the same as theirs. If you’re in the UK, speak to the National Debtline (
www.nationaldebtline.co.uk
) instead or the charity Consumer Credit Counselling Service (
www.cccs.co.uk
) for free advice and debt management plans.
Money is complicated stuff and if you want to make the most of it you would do well to call in the experts. Or as Franklin said:
‘they that won’t be counseled, can’t be helped.’
DEFINING IDEA
…If you will not hear If you will not hear reason, she’ll surely rap your knuckles.
~
BENJAMIN FRANKLIN
Paying out good money to someone else may not seem quite right on your individual way to wealth, but compared to doing the legwork yourself it is a quicker and more cost-effective way of getting the information you need to maximise your investments. That’s presuming you pay out to the right people, of course.
Most of us make it through formal education blissfully untouched by any financial education other than the concept of happy hours in bars. Yet as adults we are suddenly bombarded with financial products that would have flummoxed Einstein.
Independent financial advisers (IFAs) offer unbiased advice on financial products either across the board or in a specialist field (such as mortgages). Choosing one at random out of the Yellow Pages is unlikely to produce the kind of person you get on with best, so the first step in selecting an adviser is to ask around—go to all of your more financially sorted friends for recommendations.
Try to narrow it down to two or three people and then ask for a ‘getting to know’ session with each one. This should be free—indeed, if it’s not that may be an attitude you want to weigh up as part of deciding which one to plump for. Other things you should look for are the appropriate qualifications (in the UK, the starting point is all three components of the Financial Planning Certificate). Beyond that you should ask about any qualifications in the speciality you think is likely to be your main interest. Ask how long they’ve been in business and in what areas they have had their greatest successes.
Remember to ask about other clients. See if they can describe their typical client and consider whether you fit that bill—but do be realistic. Don’t be tempted to bracket yourself with the millionaire Monaco playboys they work for if your own life is mainly spent in a two-bed semi-detached house in the suburbs of a provincial city. Ask whether their current clients would endorse them and take the number of one who would agree to be contacted. Check that the adviser is being regulated and by what body.
Your first session should also cover the question of whether payment will be by a fee or a commission. You should be given a choice in this matter and this is also the time to ask about how accessible the adviser is by phone and email, as well as in face-to-face meetings.
Don’t forget the personality factor when you’re choosing a financial adviser, either. Since you are going to be spending time discussing the details of your life with this individual, it must be someone who makes you feel both comfortable and reassured.
HERE’S AN IDEA FOR YOU
…For all the formal questions about qualifications and specialities, the big one you should lead with is ‘what can you do for me?’. How well the IFA answers that, including precise figures of what money they expect to make and over what time, should probably be the decider for you.
