Tuesday 10th January 2017
In this issue of Money Truths….
- The seeds of wealth….
- We are working with stony ground….
- …. And tough growing conditions….
- Plant what you can anyway….
- Maximize the harvest – put £1200 aside….
The seeds of wealth….
Building wealth isn’t easy but the basic principles are straightforward.
First, spend less than you earn. And save the surplus.
Then invest. The key is to identify safe and sure investments you understand.
Diversify too. Don’t carry all your eggs in one basket. When something goes wrong – and it will – you don’t want to lose everything….
Then it’s all about time. Two, three or four decades-worth of it. As much as you can manage. But the longer you take to get started, the slower the going.
The best time to get started was 25-years-ago or any time since. The next best time is today. Starting late is better than never starting at all.
You may already be engaged with this process. You may be thinking about getting started. Wherever you are, it is never easy. Right now, we are working with particularly stony ground….
We are working with stony ground….
Far from spending less than they earn, many people live beyond their means.
We don’t judge. We merely report facts….
The Bank of England (BoE) reports that net consumer lending grew by £1.92 billion in November – the biggest increase in 11 years. Unsecured consumer credit stood at £192.2 billion. That was before the Christmas splurge….
To put that figure into context, in September 2008 when the financial crisis began, British consumer debt levels stood at £208 billion….
Last week uSwitch surveyed 1261 adults. 85% owe money on credit cards. 50% believe they’ll still be paying for this Christmas next Christmas. 65% are ‘concerned’ about debt.
People are finding it hard to stay out of debt. Particularly the young and the low-waged….
Times are tough. That’s one factor. A cultural element might also be playing a part. A study published by PricewaterhouseCoopers concludes that spending, rather than saving, is a British condition….
Annual British household spending averages £50,000 – compared to £41,000 in Ireland and £35,000 in France. Britons spend more on non-essential items than any other European nation. And they save less – just 2% of disposable income.
…. And tough growing conditions….
It will be harder than ever to save this year. Economic conditions will make it more difficult….
Inflation is at a 2-year high – thanks partly to the pound’s post-Brexit depreciation. The Consumer Prices Index rose 1.2% in the year to November – the fastest increase since October 2014.
The BoE expects inflation to rise above 2% this year. The National Institute of Economic and Social Research predicts a 4% rise.
The bottom line is that living costs are increasing. Food, fuel, housing & transport are all going up. British households will be squeezed. Every pound will buy less. Every hard-pressed salary will need to stretch further….
But wages won’t go up. They have been stagnant and will remain so. BoE governor, Mark Carney, recently reported that Britain has not endured such prolonged ‘real’ wage stagnation since the 1860s.
And whilst countries such as Finland and India are the latest to flirt with the weird economic concoction that is Universal Basic Income (free money for all), Britons must struggle-on with the fruits of their own efforts….
At least for the time being. Universal Basic Income is an idea spreading faster than a cold virus in a train carriage. Jeremy Corbyn is a supporter. It could happen here….
Plant what you can anyway….
Spending less than he earns is going to be a tough proposition for the man on the street this year. Conditions are not ideal for wealth-growing.
But we must take our lead from the horny-handed farmer….
Whatever the meteorological outlook for the growing season, he must plant his seed anyway. The alternative is to plant nothing and to be certain of starving when winter arrives….
The economy is tough. Interest rates are low. The magical effects of compounding seem to belong to a forgotten golden era. Saving money right now might seem akin to a false economy.
But if we want to pay down debt or start to build a surplus, it starts with spending less than we earn. That seed must go into the ground. But how best do we make that happen?
Some will tell you to get on a budget. But that won’t work. Not as a first step….
Pay yourself first….
Household budgets frequently don’t work in this scenario because they revolve around setting money aside to pay for everything you need and want – and then seeing what’s left to save. As often as not, that figure will be zero.
It is better to tackle things the other way. When you get paid, take what you want to save out of the equation before you do anything else. Pay yourself first. Before you spend a single penny.
Make your surplus your priority expense. Put it in a jar, under the mattress or in a deposit account. That money has been spent. In terms of your budget, it’s gone.
Now make the things you need and want fit the revised budget. You might need to trim fat. You may need to draw a line through certain extravagances. It’s a form of tough self-love. It takes discipline. And maybe some sacrifice and suffering.
But with determination and clear-eyed focus, you can make your costs fit the new budget. And the reward is that you get to live within your means. You get to pay down debt or to build a surplus. You are sowing the seed of future wealth.
The size of the surplus depends on you. You might save a lump sum each month. If your earnings fluctuate, you might save a percentage of your overall take or a proportion of your hourly rate. There’s no right or wrong way.
The important thing is that you do it and live within your means….
Maximize the harvest – put £1200 aside….
Some people will shake their heads and tell me I don’t have a clue. That it’s impossible to save money….
If that’s how you feel, I won’t press the point. I learnt a long time ago that it doesn’t pay to wrestle a pig in mud….
But I will state this: I estimate 90% of people can permanently strip at least £100 from their monthly budget simply by re-assessing what they spend and what they NEED….
Most people think they need things that they don’t….
Do you really need the entire cable TV package? Or that phone tariff? Or the gym membership? Are you really using that? Or just planning to?
When was the last time you scrutinized your utility accounts, insurance policies and all the other bills? When was the last time you did a self-audit?
Are you being billed correctly? Can you get a better deal? What can you re-negotiate? What can you do without?
Look at the recurring payments leaving your bank account each month. Do you know what they all relate to? Are there any rogue payments in there? Do you need all these magazines, memberships and subscriptions you pay for?
What about the fees you pay windows cleaners, car washers and lawn cutters? Could you do those jobs yourself and save the money?
What about household spending – on food and consumer durables? Are you keeping that in check as though your life depends on it?
Are you leaking money unnecessarily? Most people are. I believe just about anybody can cut costs by at least £100 per month. That’s extra cash amounting to £1200 a year. You can use that as the basis of your self-payment – or as an addition to it.
Look, I’m realistic. I’m not blinded by stardust. I’m not some kind of rainbow unicorn. I didn’t come down in the last shower….
I know this ‘new year resolution’ on its own will not make you truly ‘wealthy’. There’s more to wealth than making a few savings….
But making a few savings, paying yourself first, living within your means, paying down debt and growing a cash surplus are all simple and small steps in that direction.
All journeys worth making start with simple and small steps….
That’s how it looks from here….
I’ll be back with more next Tuesday morning.
All the best,