Personal Finance Questions – April 2009

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In this new feature we will answer some of the many questions we have been receiving from visitors to shrewdcookie.com. It is often said that if you ask a question chances are that many other people also want to ask that very same question.

Although we receive a large number of personal questions we have to remind you that we do not give financial advice on this website – we encourage you to visit an independent financial adviser, solicitor or accountant if you wish to discuss any particular course of action which may be prompted by an article you read on our site.

1. What are the new ISA allowances announced in the recent Budget?

The ISA limit is increasing from £7,200 to £10,200. The change comes into effect for the over 50’s from 6th October 2009 and from 6th April 2010 for the rest of the population. Of the new £10,200 limit, upto £5,100 will be allowed for Cash ISA investment, with any surplus between the amount you place in a Cash ISA up to £10,200 being available to invest in a stocks and shares ISA.

2. Inheritance Tax – who pays?

The liability for paying inheritance tax lies in the hands of the executors/administrators of the deceased’s estate. Inheritance tax is payable within 6 months after the end of the month in which the person passed away. It is possible to pay Inheritance Tax in instalments over up to 10 years – this is the case in circumstances where say the estate includes a house. There is an interest charge if you pursue this method of paying Inheritance Tax – http://www.hmrc.gov.uk/ for more details.

3. I am married to someone who was not born in this country – how does this affect our Inheritance Tax position.

Where a spouse is deemed to be non-Uk domciled then the Interspousal transfer is limited to £55,000, there in no limit to the Interspousal transfer where both partners are UK domiciled – no liability to inheritance tax on first death if you leave all your assets to your marital partner. Consult a solicitor or accountant about your own particular situation.

4. How do I get a State Pension Forecast?

To obtain a forecast of your state pension entitlement, based on your national insurance record you need to fill out and submit a form BR19 – this article – “How Much State Pension will YOU get” gives more details.

5. If I invest a lump sum now how can I easily calculate how it will grow between now and retirement?

Using the Rule of 72 – by assuming an interest rate and dividing this into 72 will tell you how long that money will take to double in value. For example, at 6% your money will double in value every (72/6) 12 years. If you had say 36 years to retirement, at 6% growth your money would effectively double 3 times. See this article for more details.

6. Can I back-date my ISA investment to use last years allowance?

No – your money needs to be invested by midnight between 5th and 6th April each year to use the ISA allowance for that tax year – there is no way to backdate an ISA investment. A case of “use it or lose it”!

7. I am a female born in 1954 – when do I get my State pension?

State retirement age for men and women is being equalised to 65 for both sexes. See this article . There is also a State Pension Age calculator provided by The Pension Service – enter some basic details and it will tell you exactly when you qualify for your State Pension.

8. Can I hold Cash in a Stocks and Shares ISA? What is the tax liability?

Yes – many providers offer a “cash park” facility whereby you can invest temporarily in cash and then switch into stocks/funds over the short term. There is the facility to receive interest on this cash held but the interest is subject to tax and a non-taxpayer cannot reclaim this tax either. See this article for more details.

9. What is the minimum deposit on a mortgage for first-time buyers?

There is no legal minimum deposit, the minimum is set by market forces – we are currently suffering from the “credit crunch” whereby lenders are being cautious about lending to people particularly with the housing market currently falling. Therefore, more and more people are being expected to make a deposit when buying their first homes – typically 10% or more is required to obtain a good interest rate product – see “5 tips for first-time buyers” for more details.

10. What is the “deferred period” on my income protection plan for?

The deferred period is the time between notifying the claim to the life office and the benefit being paid out. The plan is designed to provider a replacement income in the event of long-term absense due to illness or accident. The longer the deferred period, the lower the risk to the insurance company of having to meet a claim which therefore means a lower premium. See these article on “income protection” for more information – “Income Protection – an introduction” and “Critical Illness Cover versus Income Protection”.

These are just some of the areas we have received enquiries on in the past month. Although we cannot reply directly please ask a question and we will try to feature it in the next FAQ article next month. Add a comment below or complete this short form to contact us.

Simon

Top 10 Articles – April 2009

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The following is a list of the Top 10 articles visited in April 2009: –

1. New Tax Year – New ISA Allowance

The start of the new tax year on 6th April 2009 marked the opportunity for another tranche of money to be invested in a tax-efficient manner in an ISA.

2. Change in ISA Allowance – Budget 2009

In his recent Budget, the Chancellor of the Exchequer increased the ISA allowance to £10,200 per tax year – read the above article – the devil is in the detail!

3. Budget 2009 – Key Changes

A summary of the main changes and issues covered in Budget 2009 which may affect you and your wealth.

4. Tax Allowances and Rates – 2009

The start of the new tax year on 6th April heralded a number of changes in rates of taxation and allowances – read the article above to see just how much more money you will pay in tax this year.

5. It’s not how much you save, it’s how long

A great article introducing the time value of money as well as the principle of compoun growth and interest.

6. 10 Great Reasons to Write a Will

What I feel is one of the most powerful and beneficial articles of the last month – if you do nothing else this year, please read this article and make a Will.

7. An Introduction to Inheritance Tax

Inheritance Tax is a tax paid by those who distrust their children more than they distrust the Government. Plan early to avoid the simplest of taxes to avoid.

8. Cashflow Forecasting – plan your cashflow for the next 12 months

Short article on the principle of cashflows – how controlling your cash is an excellent habit to form – handy Excel cashflow spreadsheet available to download as well!

9. “Parking Cash” in an ISA

Great facility allowing you to place full amount into an ISA without the need to commit to investing the full amount from day one if you are concerned about stock markets and other asset classes falling further.

10. State Pension – how much will you get?

An introduction to the State pension with valuable information on changes in state pension age as well as how to obtain your own State pension forecast free of charge!

The above list details the Top 10 articles published on shrewdcookie.com in the last month based on visitor data.

Please subscribe to the Shrewdcookie.com RSS feed to receive all our articles as soon as they are published – click here.

Budget 2009 – The Key Changes

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Alistair Darling, Chancellor of the Exchequer presented his Budget for 2009 last week and below are the main points and changes contained in the Budget:

The Economy

Whilst the economy is expected to shrink by 2.5% during 2009, the Chancellor indicated that there was the expectation that the economy would grow next year, 2010, by 1.25%. I our opinion this is an optimistic forecast and we believe that growth in the economy is unlikely. He then said that the economy would grow by 3.5% annually from 2011. Whilst we would expect the economy to be heading out of recession by 2011, again we would comment that growth at these levels is again unlikely.

Borrowing by the Government is estimated to amount to £703 billion over the next 5 years which, in our opinion, is a large burden for the UK economy to endure.

Income Tax

In order to boost funds to meet this borrowing expectation, the Chancellor announced that income tax for those people earning more than £150,000 would rise to 50% from April 2010. The one comment we would make on this is that this would be fairly ineffective as people falling into this tax bracket will no doubt come up with methods and techniques to get around this additional tax burden.

In addition to this, he also reduced tax relief on pension contributions for people falling into this tax bracket, again from April 2010.  The level of tax relief for people earning over £150,000 will fall from 40% to 20% following introduction of a taper. To this end, many high-earners will consider making pension contributions following a “salary sacrifice” exercise – by effectively reducing their income levels, it is then possible for their employers to contribute directly to their pension plans, and this can be topped up by the employer also contributing some or all of the National Insurance saving enjoyed following the reduction in salary.

Employment, Jobs and Training

The Government announced support for the economy to protect 500,000 jobs and also indicated that redundancy payments would increase from £350 to £380 per week for those made redundant. From January, everyone under the age of 25 will be offered a job or training place, with additional funds paid on top of the benefits they are already receiving – in addition to this there will also be additional support for those people who have been out of work for more than 12 months.

It was also announced that funds would be made available to create an additional 54,000 places in sixth form education.

Housing and Accommodation

The government is concerned about housing and announced plans to provide £500 million to kickstart the housing market, with £100 million being made available to local councils to build energy-efficient homes. Many commentators have said that this is inadequate and will not provide for the true number of new homes needed each year. £80 million will be made available for a shared equity mortgage scheme to promote home ownership as well as £50 million to upgrade military housing.

The current stamp duty holiday for house purchases below £175,000 has been extended until the end of the year in an attempt to help first-time buyers.

The Environment

The government is committed to cutting carbon emissions by 34% by the year 2020. An extra £1 billion will be made available to attack climate change by supporting low-carbon industries. £525 million will be made available for offshore wind farms as an alternative energy source over the next 2 years with £435 million to help with energy efficiency schemes for homes, companies and public buildings.

Business

Help was announced for loss-making businesses – they will be able to reclaim more taxes paid for the last 3 years until November 2010 with the main capital allowance rate doubled to 40% in an attempt to help companies bring forwards capital investment decisions. Also announced was a £750 million strategic investment fund to help emerging industries and those industries which has an important regional position.

Savings and Investments

The annual ISA allowance was raised from £7,200 per annum to £10,200 per annum. This will be introduced from 6th October 2009 for over 50’s and from 6th April 2010 for the rest of the population.

Grandparents

Those grandparents of working age who care for their grandchildren will see their basic state pension increased to take account of this. The winter fuel allowance will be maintained at the higher level of £250 for those over the age of 60 and £400 for those aged over 80 for another tax year.

The Chancellor also announced that there would be a minimum increase of 2.5% on the basic state pension, regardless of what RPI, the index to which inflation is linked, does.

Child Benefits

The child tax credit will rise by £20 by 2010 and child trust funds for disabled children will rise by £100 per year with those for severely disabled children rising by £200.

Cars – Scrappage Scheme

A new scheme will be introduced in an attempt to remove older, more polluting cars from our roads. From March 2010, £2,000 discount will apply for those people who trade in their existing cards over 20 years old in exchange for a new car. In order to qualify they will have to be shown as the registered keeper of the vehicle for the 12 months prior to the purchase and it is expected that the Government will provide £1,000 towards this scheme with the motor industry providing the remainder.

And finally (!) – Cigarettes, Alcohol and Fuel

Tax and duties on alcohol and cigarettes is to rise by 2% – putting a penny on a pint and 7 pence on a packet of 20 cigarettes on average.

Fuel duty is to rise by 2 pence per litre and then by 1 pence above inflation each April for the next four years.

 

So there you have it – how as the Budget affected you? Who do you feel are the winners and losers of this Budget? Please make your comments below.

Deflation – it’s official!

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What is Deflation?

A deflationary climate has returned to Britain for the first time in nearly 50 years.

The Retail Prices Index (RPI) measures a theoretical basket of goods and compares changes in the price of the whole basket over time. For the first time in five decades RPI was lower over a 12 month period.

In March 2009 RPI was 0.4% lower than 12 months earlier in March 2008. In the short-term delfationary pressures could make the recession we are currently going through worse than expected as the general level of prices continues to fall.

Some people argue that falling prices is generally good for consumers, and therefore the economy, however if these deflationary pressures become entrenched over the medium term then this will actually hurt the economy as consumers will effectively stop buying products today in the hope of even greater savings to be made tomorrow.

The Office of National Statistics has said that the largest constituent part of the “basket” which has pushed prices lower was gas and heating oil bills, with falling vegetable prices over the last 12 months also making a contribution.

Aren’t Falling Prices a Good Thing?

Not necessarily as it affects some consumer groups more than others. For example, pensioners receive a State Pension which is linked to RPI – they are therefore seeing little increase in the value of their State pensions. To compound the problem, the basket of goods which the average pensioner purchases is rising in price above inflation – in real terms therefore pensioners are becoming worse off.

Pensioners who depend on their savings for additional income over and above their pension income are also suffering at present from low interest rates on their savings accounts.

Pensioners are likely to see their pensions increase by no more than £2.40 per week next year. State pension increases are set with reference to RPI figure in September which was 2.5%. The likelihood is that State pension will increase by £2.40 per week to £97.65.

The other losers in a deflationary economy are those burdened with debts – they will suffer with the debt-deflation trap – which would see the “real” value of debts increasing as the general level of prices of all other items falls.

Deflation will also affect workers as they are unlikely to receive wage increases – business owners and managers will argue that the deflation of prices in the economy is providing a boost to “real” wage values without the need to put their hands in their pockets.

 

RPI and CPI

The Government’s preferred method of measuring prices is through CPI (Consumer Prices Index) which again uses a theoretical basket of goods and considers the change in prices of these goods and the relative weightings of each good sector within the basket. CPI excludes housing and mortgage costs.

At present CPI is running still in the positive at 2.9% per annum.

10 Great Reasons to Write a Will

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In our previous article we considered the basics of will writing, setting out the key people involved in the writing and execution of a Will.

In this article we will consider the REAL benefits to be enjoyed from ensuring you have a properly written Will.

10 Great Reasons Why You Should Write a Will

1. To allocate assets between different people.

You may wish to leave jewellery to a niece, or promised a grandson your war medals. A Will can formalise all these gifts and help prevent family arguments – remember this – family and money rarely mixes!

2. If you’re not married then you need to make Wills.

There is no automatic transfer of assets between couples who are cohabiting. Other than jointly owned asset which would pass to the surviving owner on first death, in law, all other assets could pass back to the deceased’s family under intestacy rules. In practicality though it is unrealistic to expect your deceased partners family to come asking for his/her DVD collection but a Will formally arranges your affairs after death and avoids problems later.

3. Leave assets to an ex-partner.

It could be that you have now remarried or are living with someone else. A Will could be used to leave assets to an ex-partner, for example, they may have made a large gift to you during your relationship which you would like to return to them in the event of your death.

4. Reduce the amount of Inheritance Tax you pay.

In the current tax year we can each leave an estate of up to £325,000 (2009/2010 tax year) with immediate liability to inheritance tax. Anything we own, over and above this £325,000 Nil Rate Band is chargeable to Inheritance Tax at a rate of 40%. A Will could be written to leave up to £325,000 to be split equally between children or held in Trust for their benefit. Under a normal “British” Will it is usual for all assets to pass between husband and wife. It might be prudent to still include a will trust to hold £325,000 for the benefit of your children – leaving all your assets to your spouse could see that money all eaten up in care home fees – it is vitally important that you take legal advice in this respect.

5. A Will can be used to make assets skip a generation.

It may be that your own children are financially successful in their own right. Passing assets to them on your death may be of no benefit and could simply compound their own Inheritance Tax problems later by artificially expanding their Estates. If this is the situation then why not leave your Estate to benefit your grandchildre, or even great-grandchildren if that is the case.

6. A Will can be used to set up a Trust.

If you are fortunate to have a very large Estate you may choose to set up a Trust to benefit a local charity or support group in terms of providing them with a regular income. Seek legal advice if you are considering this course of action.

7. To avoid Intestacy.

If you don’t make a Will then the Government have already made one for you. These are known as the rules of Intestacy – you are said to have died “intestate” if there is no valid will at the time of your death. For example, if you are married and die with a spouse and children then your spouse doesn’t automatically get eveything – if your Estate is less than £250,000 everything goes to the surviving spouse. If the estate is over £250,000 the surviving spouse gets £250,000 and all personal possessions.

Half of the remaining estate is split equally between the children with the spouse retaining a “life interest” e.g an income from the remaining 50% with this 50% ultimately being split between the children on second death.

As you can see – assets being allocated in this manner can and does cause problems after death.

More information on intestacy rules can be found here – HMRC – Intestacy Rules

8. You need to appoint Guardians for your children – this is vitally important.

In the absense of a Will it would be the Courts/Social Services who decide where your children are best placed – and it might not be with the people you thought would look after and raise your children. By making a Will with Guardians named for your children you can avoid this uncertainty. You should also consider putting in place life insurance to provide for your children in the event of your death – consider this – it could be very difficult if one day two children turned up on your doorstep expecting to be looked after until they are 18 and there is no money there to fund them!

9. If you are separated but not yet divorced.

You should write a will with the will written in view of the divorde going ahead as there is a possibility in law that, in the event of your death, your asset could pass back to your ex-partner. Although you are separated, in the eyes of the law your ex-partner might be entitled to your Estate after your death!

10. If you have been married previously or you don’t trust/like your spouses family.

You might care to write your Will so that in the event of you both dying together your assets don’t end up passing to your spouse’s family. For example, if you were killed in a car crash, in the eyes of the law, the eldest person is deemed to have died first. It is possible that their Wills leave all their assets to their families – you could see your assets momentarily pass to your spouse before passing straight to her family. Is this what you want to happen?!

We hope this article was of some benefit in sparking an interest in writing your own will.

Will Writing – an introduction

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Why you need a Will

There are many reasons why it is prudent from a personal, as well family perspective, to ensure you have a suitably worded Will in place – and Will Planning is not just for old people either!

What is a Will?

A Will is your written instruction which formalises what is to happen with your estate, and your children, after death. It can be a shrewd tax and estate planning instrument when used correctly and there are also a number of reasons why you should write a will sooner rather than later. We will cover these further in our next article in this series. This article is an introduction to Will Writing.

There are several ways in which a Will can be written – you could use the services of a Solicitor, a Will Practitioner/Specialist, a financial adviser or even a “DIY” Will purchased from a stationers.

In order to make a Will you need to be of sound mind and over the age of 18.

What is contained in a Will?

A Will sets out the administration of your estate in the event of your death. In it you can state your funeral preferences together with details of any gifts to charity or the National Trust.

Individual items can also be named, for example, leaving jewellery to a daughter or military medals to a grandson.

The Will for the most part will deal with the distribution of your estate – these are all your worldly goods and possessions. It is common for married couples to leave everything to each other and then shared equally between children on second death – this is generally known as the “Great British” Will – and may or may not be the most efficient and effective way of administering your Estate.

Who is involved in the Writing of a Will?

As the person making the Will you are known as the Testator (Testatrix if female) and the Will will be witnessed by two individuals who are not to benefit under the terms of the will – these are the Witnesses.

In the Will you nominate a person or people to administer your Estate after your death – these people are known as the Executors and it is their legal obligation to ensure that your wishes are carried out to the best of their ability.

I have an existing Will – does it need changing?

It is important to ensure you review your Will on a regular basis as people’s circumstances do change and the Will previously written may no longer match your wishes.

In addition to this, on several occasions, during my time as a financial adviser, I came across situations where people simply do NOT have a valid Will – in one case for example, the person had received their copy of the Will back from the Solicitors office and had simply filed it away without signing and witnessing the Will – remember – you need to ensure you sign your Will and that this signature is witnessed by two independent witnesses for it to be valid.

Is it feasible to make my own Will?

Although it is possible to write your own Will it is always advisable to have your Will written by an expert, such as a Solicitor or STEP practitioner.

A word of caution – in many cases the person writing the Will may wish to add themselves to the Will as an executor – I would always err on the side of caution at this suggestion. This person would be acting in a professional capacity and therefore the level of charges which might be incurred could be an unknown. You could in effect be writing a “blank cheque” on your estate by including a professional to act as an Executor on your Will. Remember – the other people acting as Executors (e.g. family) can always bring in professionals to act, at an hourly rate or agreed cost basis, should the need arise.

Next article – 10 GREAT reasons for Writing a Will

Cashflow Forecasting – planning income and expenditure

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Introduction

Historically, cashflow forecasting was a method used by business owners, managers and accountants to analyse income and expenditure over a set period of time. By analysing inflows and outflows of cash for each period, e.g. each month, they were able to see what strains they would have on cash at any one time – e.g. was there any particular month or months where they needed to draw on other sources of cash.

Similarly, the use of a spreadsheet allowed the business manager to perform a number of “what if” scenarios – “what if” price increased 10%, “what if” this loan was repaid early.

Cashflow Forecasts and Personal Financial Planning

These same principles can be applied to your own personal finances. We all tend to have the same regular inflows and outflows of cash – e.g. if you’re in a salaried position then your net take home pay will tend to be the same each and every month. It is the irregular payments that can cause problems, for example car insurance premiums paid on an annual basis, payment for holidays etc.

By entering your expected income and expenditure each month into a spreadsheet it is possible to see the monthly flows of cash that you expect to occur.

The spreadsheet which accompanies this article contains most areas the typical family might find in terms of income and expenditure.

To Download Cashflow Forecast

Download the cashflow forecast spreadsheet –

Excel 2003 version – cashflow_forecast.xls

Please register for updates

We will announce all changes, improvements and amendments to the spreadsheet through our newsletter – register for our newsletter.

Please feel free to pass copies of this spreadsheet to friends and family and add this page to favourites as the spreadsheet will be updated from time to time as

Feedback

Please give us feedback on whether you found this spreadsheet useful or not and check out other downloads as they become available at our Download page.

Related Articles

I hope you find the cashflow forecast spreadsheet useful.

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What personal finance topics would you like us to cover?

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We are receiving a steady stream of contacts from people asking various questions, and although we cannot specifically provide “advice” in the regulated sense, we are keen to ensure that our articles are relevant to the topics you are interested in reading about.

Please comment below or contact us via our contact page to outline those areas of personal financial planning you are interested in reading about.

We will then take into account requests and suggestions when planning and writing future articles.

Hope you’re finding the site useful!

Simon

Trusts – Protecting Wealth and Financial Planning

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Trusts – An Introduction

This article is an introduction to Trusts and how they can be used in financial planning to achieve your money and wealth goals not only as a tax planning tool but also to protect your existing wealth.

What is a Trust?

A Trust is any arrangement whereby one person(s) manages and looks after assets for the benefit of another person or people. It is a legally binding agreement and is covered by various Trust and Taxation laws as well as judicial precedent.

Who is involved?

There are three classes of person involved in the setting up of a Trust – a Settlor is the person who sets up the trust, normally to receive their own assets – the trust assets are looked after by the Trustees for the ultimate benefit of the Beneficiaries.

During the term of the Trust, the Trustees are the legal owners of the Trust assets but the Beneficiaries are the beneficial owners. It is the Trustees legal responsibility to ensure that all decisions made in respect of Trust assets are made in the best interests of the Trust’s Beneficiaries.

It is normally good practice to have more than one Trustee and in the majority of cases the Settlor will also be Trustee. In line with this, it is also possible to name direct individuals to be Beneficiaries under a Trust or this could be written into the Trust to cover a group of people – for example, “all my children who survive me by 28 days”.

How is a Trust set up?

A Trust is generally set up by completion of a Trust deed. This deed sets out the nature of the Trust, the Beneficiaries of the Trust and the powers and obligations of the Trustees.

In respect of life insurance policies generic Trust wording can usually be supplied by the life office to help the Settlors’ legal representative ensure that a correctly worded Trust is put in place.

Are there many Different types of Trust?

Yes – there are a number of different types of trust and they all have different purposes – further information on the different types is available from your Solicitor – the purpose of this article is to introduce you to the topic of Trusts and how they can be used in relation to your own personal financial planning. In future articles we will deal with some of the more common Trust arrangements in more detail

How are they used in financial planning?

Two of the most common uses for Trusts in financial planning are to protect assets from taxation or creditors or to ensure that assets pass to the correct beneficiary in the event of the death of the Settlor.

The majority of people reading this article may come into contact with a Trust arrangement through taking out a life assurance policy.

The Settlor, who is also usually the life assured, sets up the Trust using a standard wording provided by the life office (which it is advisable to get checked by a suitable qualified Solicitor) to leave the benefits from the policy (the sum assured) for the benefit of specific individuals.

A normal course of action would be for a parent to effect a life policy and place it in Trust for their children. There are several benefits to this course of action:

1. The sum assured on death is outside of the deceased’s estate and is therefore not normally subject to Inheritance tax.
2. The proceeds from the plan can normally be paid out quicker as there is no need to wait for probate to be obtained to allow release of funds. Usually provision of the death certificate and a copy of the Trust is all that is required.
3. It stops third parties accessing the funds which may not be what the life assured intended – it’s amazing who can “come out of the woodwork” when someone dies and there is money to be shared out!
4. It stops the sum assured being used to repay debts of the life assured in the event of the life assured dying whilst being insolvent or having large debts.
5. If the Beneficiaries are young children then the money can be held within the Trust and the Trustees would usually have the ability to make advances of the funds for the welfare and benefit of the children, whilst retaining the monies until the children are older and better able to manage their own affairs.
6. Grandparents could utilise a Trust to allow their assets to effectively “skip a generation” and be passed to grandchildren which is a particularly popular arrangement where their children are already wealthy in their own right.

What about Tax Planning?

Yes, Trusts can also be used for tax planning and in later articles we will discuss the various Trust planning tools available in the UK today. Gifts can be made into specific Trusts which provide an immediate saving against Inheritance tax; other Trusts exist to remove growth of investments outside of an Estate whilst still allowing the Settlor access to their capital.

Please add any comments below.

Needs and Wants – the Basics of Budgeting

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As with all topics, it’s best to start at the beginning with the simple steps first.

Sorting out Your Finances

In order to make decisions about what steps to take with the various aspects of your personal financial planning it is important to take a “snapshot” of where you are at at this moment in time.

A plan is just that – a plan – you decide on where it is you want to “arrive”, consider your current “position” , weigh up the various methods of getting there and choose the path which seems most appropriate to your current family situation, income profile, future employment prospects.

Where am I now?

There are three basic areas which you need to give serious consideration to which will help you formulate in your mind the starting point for your journey through your personal finances!

1. What do I OWN?
2. What do I OWE?
3. Who owes ME?

This will create a snapshot of your current “ME” position. In terms of what do I OWN – do you own your own house (what is its value?), what savings do I have? What investments do I currently have?

Basically, you need to consider all assets, either tangible or intangible.

Is a car an asset or liability? In one respect it is an asset as it allows you to travel to and from work, allows you to earn a living, saves you TIME not having to walk.

But in another respect it is a liability – you need to buy it, service the car loan, put fuel in it, maintain it, insure and tax it, then after several years and £1,000’s of depreciation you have to swap it in for a newer car.

After you have made a list of all your assets you need then to consider all your liabilities – just how much do you owe, how much is it costing to owe that money (interest rate) and is the amount you owe rising or falling over time?

Finally also consider all amounts owed to you – who owes you money? What is the prospect of it being repaid?! This money owed to you is an asset.

Finally consider all the “intangible” assets you own – these are not physical items like cars, jewellery, shares in companies etc. These are the skills, qualifications, knowledge, contacts and relationships – for many people when they are starting out in life these “intangibles” are considerably more valuable than the “tangibles”. In an ideal world, over time in order to build your wealth you need to follow this formula: –

“intangibles” + time = “tangibles”

4. How much cash is left over each month?

When you first start out on your wealth-building path you will generally start with very few “tangible” assets – you have skills, qualifications, drive and determination, perseverance etc. but you have very little in terms of assets – cash, investments, etc.

There are two main ways to increase your personal wealth – earn more than you spend and grow what you already own. Don’t count on inheritances as they may never come – the cost of residential care for the elderly will wipe out the majority of inheritances in the current economic and demographic climate.

Budgeting – Needs and Wants

Most people, us included, will have a set monthly income and expenditure. Have you actually analysed what you have coming in and going out each month?

It would be wise therefore to sit down and go through bank statements, bills etc and work out exactly just what you have coming in each month and what you spend it on.

The title of this article is “Needs and Wants” – all our expenditure can be split between being either a “need” or a “want”.

Accommodation – a “need” for all of us – as is food, clothing, water, heat and light.

“Wants” – these are all the other things – we may “want” the top package from our satellite TV provider – but do we “need” it?

The goal here is to identify all those items which you buy on a monthly basis which are “wants” and not “needs” – for every transaction simply ask yourself “Do we need this or do we want this?”

If it’s a “want” – ask yourself – should I spend my money on this “want” now which will give me some short-term pleasure or should I save the money so I can have more “wants” tomorrow????

This article links into the other article – “Pay Yourself First”

Please let me know what you think? Have you sat down and gone through and identified where you are wasting money each month – an increasingly important activity for many people with the “credit crunch” and current economic climate.