Personal Finance Management (PFM) Tools in the UK

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I have just been reading an interesting article by Rob over at money-watch.co.uk about Personal Finance Management (PFM) tools available to us in the UK.

Personally I have been using Microsoft Money for over a decade to manage my personal finances, which, together with my personal spreadsheets which have developed over the years, seem to serve me pretty well!

Unfortunately it would appear that the MS Money software has been discontinued in the UK but the version I used is still available from Amazon.

It would however appear that these services are now moving online – which is a natural progression since most of our personal financial activity seems to occur online these days – online banking, managing our ISA/Unit Trust/Sipp portfolios as well as managing our credit cards and various other financial commitments.

Anyway – be sure to check out Rob’s article – the first in a series.

Increase your Wealth – Take a Pay Cut!

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It may sound like a crazy notion to increase your personal wealth by taking a pay cut – however can that work?

It’s simple really.

Most people have a limited income yet infinite needs and wants. They earn a fixed amount, or the household has a fixed monthly income, they spend, spend, spend first and save what is left over. I will be the first to admit that I used to “waste” money each and every month – bottled water (!), pre-packed sandwiches, not shopping around for more competitive insurance/utilities etc….

Result = there is rarely anything left over at the end of each month – “which runs out first, the month or the pay packet?”

It has been quoted many times (such as in The Richest Man in Babylon – a great book and worth the £3.46 price tag!) that those who build lasting wealth are those who SAVE first and then SPEND what is left.

By taking something off the top of each pay packet you can set this aside, firstly to build a “rainy day fund”, and then to consider medium and long-term investments.

It will be difficult at first as the decrease in monthly income can be noticeable, but over time, your spending patterns will be altered to match your new “lower” income level and quite quickly you will notice the increase in your personal wealth.

How Noticeable Will This Be?

If you set aside just £50 per month, and invest it to receive a net return of 5% per annum (which should be achievable) over a ten year period this will grow to £7,764.

If you could achieve 7% net per annum, this would amount to £8,654; which if continued for a further 10 years would £26,046.

The more you save, the quicker it will grow.

My Experience

I am fortunate in that I earn a decent income and am able to set aside £700 per month. If I continue this level of investment, I am currently on course to achieve full financial independence by the time I am 50.

It’s hard at first, but after a while your lifestyle adapts to the “pay cut” you choose – I find I now plan purchases ahead – I got rid of my credit cards – it’s addictive (although I do still enjoy life to the maximum – I just don’t waste money any longer!).

Where Should You Start?

Simple really – just keep a track of what/where your money goes on a regular basis for the next month or so – then analyse and be strict with yourself –

  • Do I really need to spend money on this item?
  • Is there a more cost-effective alternative?
  • What changes can I make in my lifestyle now to build the future I want rather than the future I currently have in-store?

Let me know you’re successes in “taking a pay cut” below.

Some end of tax year planning ideas – 5th April 2010

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The end of another tax year is steaming towards us with the 2009/2010 tax year ending on 5th April 2010.

Here’s a quick rundown of the main areas for consideration – hopefully this list may jog your memory or form the basis for you to have a meaningful conversation with your financial adviser, solicitor or accountant!

ISA’s

Under current rules, over 50’s can invest up to £10,200 in a Stocks and Shares ISA before 5th April 2010. Of this £10,200, up to £5,100 can be invested in a Cash ISA.

Under 50’s are currently limited to £7,200 in a Stocks and Shares ISA, of which up to £3,600 can be placed in a Cash ISA.

More articles on ISA’s

Pensions – Retiring Early

The minimum age for taking benefits from a personal pension plan (PPP) increases to 55 from 6th April 2010. Until then it is possible to take your personal pension plan from age 50. So if you’re in that window of people who are aged over 50 but under 54 before the end of the tax year and you wish to take your pension benefits early you need to talk to your financial adviser or pension provider pretty smartish!!

I wrote a more in depth article on this topic here – change in retirement age from 50 to 55 for pensions.

Pension Contributions

Generally everyone can contribute up to 100% of salary/income to a personal pension plan, or up to £3,600 gross if your a non-earner (housewife/husband, children etc…).

Pension plans are available for anyone under the age of 75. Pensions have a number of tax benefits. You generally receive tax relief on the money you invest – and this is provided at basic rate up front e.g. invest £80 and you actually have £100 credited to your pension plan. Non-taxpayers also get this tax relief – money for nothing from the Inland Revenue – surely this can’t be true!!

Pension funds grow in a tax-efficient manner and, under current rules, you can take 25% of the fund as a tax-free lump sum at retirement (ages 55 to 75 from 6th April 2010) with the remainder of the fund used to provide an income, in one form or other, for the remainder of your retirement. This income from your pension is generally taxed as income.

A pension plan is a long-term commitment so seek independent financial advice before investing.

Pension Contributions, Investment Bonds and Higher Rate Taxpayers

Also, if you’ve made a chargeable gain on disposal of an investment bond and you are a higher rate taxpayer it may be able to offset the additional 20% tax liability by making a contribution to a personal pension plan – the contribution has the effect of extending the basic rate tax bracket and therefore, through careful planning, if may be possible to avoid paying this additional tax on surrender after carrying out a “top slicing” calculation.

See a technically-competent financial adviser!

Capital Gains Tax (CGT)

Each person has a capital gains tax allowance (£10,100 for the current tax year) which means you can make gains on the sale or disposal of certain taxable assets of up to £10,100 before 5th April and pay no tax. Any gain over and above this are currently taxed at 18% – although this could change.

I normally think of the CGT allowance as the “unused allowance” as many people are not aware it is there but it can be a useful tool for planning your tax affairs if you have such investments as shares held directly in a limited company, etc.

 Naturally you should consult a tax expert before making any disposals to ensure that the allowance can be used properly – phone your accountant as soon as possible!

Bed and ISA – using your CGT allowance wisely

This CGT allowance lends itself ideally for anyone holding unit trusts as it generally allows a person to surrender unit trust and reinvest in an ISA tax wrapper before the end of the year without any tax to pay now, or on any future gains under the ISA wrapper.

Make Tax-Free Gifts to Reduce Inheritance Tax

This subject is generally beyond the scope of this article (I am trying to get this article published as soon as possible as I have been away on holiday!). HMRC (The Inland Revenue) have detailed information on allowances, reliefs and gifts to reduce your IHT liability here.

Transfer of Income Producing Assets

Both husband and wife have their own personal allowances for income tax and often it is the case that one or other partner has all the income-producing assets in their own name. The HMRC website gives details of personal income tax allowances for the 2009/2010 tax year – moving funds between husband and wife can sometimes reduce your tax burden.

Finally…….Tax Year End falls on a Bank Holiday – act soon and avoid disappointment!

Don’t forget – 5th April 2010 this year falls on Easter Monday – so with Friday 2nd April being Good Friday (both days being Bank Holidays remember!) it would be prudent to ensure all planning, ISA’s etc are completed well in advance of say 1st April!!!! Don’t leave it too late!

Remember, this site doesn’t give financial adviser – make sure your consult a suitably qualified independent financial adviser or accountant before taking any end of tax year financial planning actions which you are not sure about.

Why a falling stock market isn’t always a bad thing!

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The one time when a falling stock market is NOT a good thing is when you want to take money out of the market in the near future – your portfolio can move horrendously against you within a matter of weeks if not days.

There is, however, a time when a falling stock market is a GOOD thing – that’s when you’re actually putting money into the market (as I have been doing over the last couple of years).

Now I’m not saying now is the right time for YOU to invest in the stock market – we all have our own reasons for investing (or not, as the case may be). My investment strategy, time horizons, attitude to investment risk etc will probably be different to almost everyone else’s so the actions I take may not be the actions which you should take!

The stock market performed a fantastic turnaround in 2009, with the FTSE100 rising from 4,434.20 at close of trading on 31st December 2008 to 5,412.9 at close of trading on 31st December 2009 – an increase in the FTSE100 of 22.1% during 2009.

Who knows where it will go next?!

Well, anyway, as part of my broader portfolio, I bought some shares in December in Tullow Oil (TLW.L) which is an oil drilling and exploration  company with interests in the African continent as well as other geographical areas. At the time I bought them, their shares stood at £12.99 per share. I had £1,000.00 to invest and therefore was able to purchase 76 shares back in December.

There has been a certain amount of volatility in the stock market recently and today I noticed that their share price had in fact dropped to £11.62 per share – a fall of £1.37 per share or 10.55% compared to what I paid for my shares back in December.

Now many people would be unhappy about this – not me! I saw it as a buying opportunity. I therefore decided to purchase another £1,000 worth this morning.

I am in this for the long run and will possibly hold these shares for in excess of 5-10 years so I took advantage of the recent fall in price to add more shares to my portfolio and benefit from pound cost averaging.

So what does all this mean? Well, I was able today to buy these shares at £1.37 per share less than I paid for them in December. I have drawn up a spreadsheet to demonstrate the benefit to me of this course of action.

 

 

I have included the dealing costs and stamp duty (0.5% on purchases) to take full account of the trading situation. You can see from row 1 that the total cost of my purchase of 76 shares in December was £1,007.28 giving a total acquisition cost per share of £13.25. Today I bought 86 shares at £11.63 and row 2 shows the total acquisition cost of £1,019.12 or £11.85 per share. So my purchase today cost me £1.40 per share less than in December.

Now here’s the interesting bit!!!

The second half of the spreadsheet answers the question “at what price per share do I have to sell to get my money back and break-even?”

Row 1 shows that had I not bought those shares today then to recoup the £1,007.28 outlaid in December, together with the £14.95 dealing charge to sell, I would need the Tullow Oil share price to hit £13.45 (last column) – this is the break-even price for my holding as it stood prior to today’s purchase.

Now consider the next row down – because I was able to reduce the average buying cost of my two lots of shares in Tullow down to £12.51 i have “pound cost averaged” down the cost of this holding in my portfolio.

The second row shows that to recover £2,026.40 (total cost of both the purchases in December and today) together with dealing charges of £19.95 (next tier of dealing charges) I would need to sell the shares for a minimum of £12.63 per share.

So in summary, had I only bought the December shares I would need Tullow Oil share price to hit £13.45 to break even.

Now with today’s “cheaper” shares I have reduced this break-even share price down to £12.63 per share – 82 pence per share lower. In effect, each and every penny that the Tullow Oil price rises over and above £12.63 is profit to me!

This therefore gives me scope for larger gains at a later date when I ultimately sell this holding.

If the price drops even further I will consider whether to invest further funds to reduce my break-even price even further.

Warning!

This is not a recommendation to buy shares in Tullow Oil or indeed that share ownership is suitable for YOU! The value of shares and the income from them can fall as well as rise and if the company went bust I could lose all my money. Do not act on this article without first taking suitable advice from a qualified stockbroker or financial adviser. You have been warned!!

7 Changes I’ve Made to Save the Planet and Me Some Money

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At the start of 2009 I made a pact with myself that this year I would make as much effort as possible to change my lifestyle for the benefit of the environment as well as putting more money in my pocket.

Here’s what I have managed to do so far:-

1. Walk to work instead of drive

Since relocating to Bristol about 4 years ago I had been in a position where I was commuting to work, in my car, for 2-3 hours each and every day. It wasn’t a long trip – about 8 miles each way – it was simply a case of the congestion in and around Bristol holding me up.

The benefits to me of moving away from this “daily commute” were several – saved petrol and wear and tear on my car, saving the environment and natural resources, saving me time (my favourite savings by the way!) not sitting in the car for such periods of time as well as the health benefits of moving away from the stress of the daily commute.

In order to make this change I decided to move to a new company closer to home – and am I glad I did – I know have a fantastic 10 minute walk to work through some of the most beautiful streets in Bristol. The car rarely moves off the drive in the week now and I have extra money in the bank each and every month!

2. Give up pre-packed sandwiches and bottled water

Not only are they expensive (how can bottled water, in some instances, be more expensive than petrol?!) I used to buy a sandwich on a daily basis, as well as a bottle of water for work. Not only were these expensive (when compared to the alternatives of drinking tap water and making my own lunch) but stopping buying them also did a little bit for the environment as there is no rubbish (plastic wrappers and bottles) thrown away each day.

3. Taking the Train to Visit Parents

I was surprised when I looked into it that I can get a train from Bristol to my folk’s house, and back, at the weekend for less than the cost of the petrol I would burn to drive there.

OK, it takes a little planning and I have to walk a couple of miles to the stations, but this is one less car on the road, I have three hours of my life back for doing more productive stuff – especially if I am lucky enough to get a seat with a table on the train – and the train is going there anyway so the environmental impact is considerably reduced.

The result is I arrive fresher and less stressed than I used to and I see some fantastic countryside on the way there!

4. Unplug – not standby

Like most people, my TV/DVD player, radio, microwave, etc had all been left on standby for years. I was aware that this was using electricity but not to the extent that in reality it is.

I now turn off at the wall all my electrical items when they are no longer in use.

5. Holiday in the UK this year

Having been abroad most years for the last decade I decided that this year I would not fly abroad and would holiday at home. My goal was to minimise the total cost of the holiday and to this end we went camping! This was a great adventure and bought back a lot of childhood memories.

I’ll admit it takes a bit to get used to having to get out in the middle of the night to go to the toilet in the middle of a field and waking up to a cold tent, with lots of condensation, even in the middle of summer.

But it was more than just a holiday – it was an adventure – money was saved – and a great time was had by all of us – it just proved to us that we don’t need to jet off abroad and spend lots of money in fine restaurants to have a great time. We will certainly be doing it again next year.

6. Use email instead of posting stuff

Another concern I had to address was the amount of paper being wasted in running my investments, bank accounts, pensions, bills etc and the almost daily fall of half a rain forest through my letter box.

I registered with the Mailing Preference Service – which stopped most of the junk mail coming through the letter box in a couple of weeks. I moved all bank accounts to paperless statements – I don’t need paper ones – they have historically been filed away and never looked at again until destroyed after 7 years as I am self-employed.

7. Stopped buying newspapers and magazines.

Whilst having a clear out a few months back I was shocked at the amount of newspapers and magazines I had accumulated. I noticed that these were not cheap with the average magazine costing £3 – £4. The majority of the pages are adverts which I am not interested in anyway.

So I have not bought a newspaper or magazine at all this year – a great savings – I get my news and current affairs fix from the internet and TV now.

And the next 7………….?

I am sure there are many more changes I can make to put more money in my pocket as well as doing my bit for the environment – please let me know by leaving a comment below what hints and tips you would like to share with us.

19 Essential Money Tips for Students

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Thousands of students will be leaving home and heading off to places new, far afield, in search of education and trying to avoid poverty.

Here are 19 tips which helped me through Uni on a tight budget.

1. Which bank should I open a student account with?

Find out which bank has a branch close to campus – it can be useful to bank with the local branch as they will generally be more understanding of student needs – remember they are trying to capture you as a lifelong customer (it’s a dog eat dog world out there!), although in this day and age of cash machines and internet banking it might be more important to you to choose the bank which is offering the best “enticement” to bank with them.

In an article I will be writing next week I will compare and comment on the student offerings of the various banks – be sure to subscribe to ensure you receive a copy once published.

2. Make a budget and stick to it!

Ensure your money doesn’t run out before the end of term – you might like to use our income and expenditure spreadsheet to plan how your money will be coming in and going out (!).

3. Do I need a credit card?

Many institutions will be offering you a credit card which can be tempting – we’ve all been there! The thought of a £1,000 or more credit facility can be very tempting – but remember, that it’s not really a credit card – it’s a debt card and unless you pay off the balance in time, each and every month, you will start paying interest – then that great bargain you saw whilst out shopping will not be such a great bargain once the interest starts accruing.

Did you know you can get a prepaid credit card – these allow you to add money to them – either online from your bank account or through a Post Office – I have one for travelling and it is a Mastercard – ensuring it can be accepted at all places where Visa and Mastercard are accepted. There is no possibility of incurring any interest or debt with these and are a wise choice for students as parents can top them up at home for you as well with the money normally being available almost instantly if credited at certain retail outlets – ideal for those emergency situations.

4. Set aside your rent before you do anything else!

Once you have your funds in place, whether that be a student loan or money which you have saved personally, set aside your rent for the term or academic year in a savings account to ensure your don’t spend it elsewhere – many students, myself included, had to go cap in hand to their folks asking for a “loan” a couple of weeks before the end of term.

5. Fresher’s fair – beware of “joining societies” syndrome

Freshers fair is a bustling hive of activity – all the societies and clubs will be vying for your membership – we all thought it would be a good idea to join plenty of clubs and societies – “a discount if you join today!” – only to never attend a single event – beware – choose carefully!

6. Pay your Bills on Time

For many it will be the first time they have had to manage their own finances – ensure that your mobile phone, gas, water etc bills are all paid on time – you don’t want to receive red letters and be charged fines for missing payments – you probably don’t have enough money as it is!

7. Try not to use a car

Many students feel the need to use a car whilst at University – not only are they expensive to run but they also affect the environment and cause local congestion in the University city in which you live.

  • Walk if possible
  • Live on a bus route – most cities have excellent transport facilities to and from University campuses
  • If you must use a car try car sharing – sharing the petrol and cutting down on the congestion

8. Earn some money

Most students I knew had to supplement their income by working, either during term time or after the end of term in the holidays. Make sure that any work you do does not interfere with your studying – that’s what you’re at University for! You can earn £6,475 in the current tax year (up to 6th April 2010) without having to pay any income tax – ensure your employer gives you the correct tax code.

9. Start your Own Business

Today there are more opportunities for students to earn a living on the side – selling stuff on Ebay, car boot sales, writing a blog and earning an income from advertising (not easy) – be creative – you don’t need to stack shelves in a supermarket!

10. If in trouble ask for help

If you have money problems speak to someone about it – parents, friends, Student Union (they will have excellent staff who can really help you sort things out) – the worst possible thing you can do is stick your head in the sand and ignore an issue – it won’t go away and will most likely get even worse.

11. Avoid fraud

Be wary of any offer which looks too good to be true – it often will be! There are a lot of scumbags out there trying to take your money off you – just be careful.

12. Don’t carry lots of cash

There is no need to carry lots of cash with you – you might drop or lose your wallet or purse, or even worse. Get a pre-paid credit card – it can be cancelled and be replaced – cash can’t

13. Get contents insurance

Many specialist insurance companies offer policies ideally suited for students. You may not think you need insurance but consider how much it would cost for your replace that laptop or that hifi, that nice new LCD flatscreen. Policies are not expensive and are strongly recommended – it’s a sad fact that student accommodation can get burgled – we were but thankfully we were insured.

14. Shopping around can save you money!

You don’t need me to tell you that buying the latest DVD etc in the shops cannot be improved on by shopping online – make sure you shop around to get the best deal going – there is no need to pay top dollar for any purchase – and as a student you will have plenty of free time to shop around and plan ahead for birthday and christmas presents.

15. Student Card – Use It!

Many retailers in University towns will offer discounts to students – your Student Union will probably issue you with a list of local traders – use them – save money.

16. Student Nights

Many clubs will offer student nights – usually in the week – when I went to Uni back in the early 90’s it was free entry and £1 a pint! Cheaper than drinking in the local pubs and clubs.

17. Don’t hang out with frivolous people!

“Keeping up with the Jones’s” when you are at University and it is fair to say that some students will have considerably more money than you – it’s difficult to keep up a champagne lifestyle on a tap-water income! Choose your friends wisely – you will probably spend the next 3 years trying to shake off the friends you make in the first 3 weeks anyway!

18. Buy One Get One Free!

Take your time in the supermarket – there are some great offers if you look. Learn to cook – there are loads of simple recipes online for students – here’s a site I just found – it can be fun to cook your own food – pre-packed meals are boring and if you cook too much save some for later or invite some friends over.

19. Avoid getting into trouble – get a TV License

If you live away from home you may need to ensure there is a TV licence in place. Visit the TV Licensing website to find out about your own particular circumstances.

Please share your own hints and tips by adding a comment below.

And finally……..

Ensure you receive all future articles by joining our newsletter. It’s free to join and you can cancel at any time.

All our articles are also available through our personal finance RSS feed.

Interesting article –

Check out this article over at moneywatch.co.uk – the most expensive and cheapest University towns

Buy a Financial Calculator

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Anyone who is committed to increasing their personal wealth would be strongly recommended to buy a financial calculator.

I bought my first financial calculator when I was at University some 18 years ago, it was a Hewlett Packlard 10B Business Calculator, and I still use it today. The model has been updated now – Hewlett Packard 10BII – but the new model still offers the same great facilities I have come to know and love.

It carries out all the normal calculations you would expect of a scientific calculator, but also provides the ability to calculate the following:

Growth of a set level of regular savings, given amount, rate of interest and term in years is known
Net Present Value (of a range of regular inflows of cash)
Internal Rate of Return
Compound Interest Calculations
Time Value of Money

For example, if I save £100 per month, for 25 years, at 6% interest this calculator will calculate the future value of my savings (the answer is £69,299!). If I change this to 26 years, the answer is now £74,807 – an additional £5,508 for investing for another 12 months!!!

For retirement planning, say I have identified that I need a pot of £360,000 in 23 years time to retire on the income I need to live in retirement, I can calculate how much I need to invest on an annual or monthly basis, assuming any rate of return, to hit the target.

The third calculation I like to use the calculator for is calculating how long money will last for, for example, I have £10,000 today and I wish to draw £250 per month from it. Based on an interest rate of 4%, my calculator shows me that my money will last for 43 months.

Here’s the manual (4.0MB) for my Hewlett Packard calculator – it shows all the different calculations you can do with a financial calculator.

Buy a financial calculator from Amazon.

Related articles:

Rule of 72 – Time Value of Money

It’s Not How Much you Save, But How Long

Are you £1 ahead or £1 behind?

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I was reading an excellent post over at Seth Godin’s blog which got me thinking about budgeting, wealth and financial independence.

The article talks about how over 2 billion people on this planet live below the poverty line. Now for one moment, the chances are that if you are reading this article, you are not living in the abject poverty being suffered around the world but you could be in a state of personal financial “poverty”.

Do you spend more than you earn? Does more money float out of your bank account each month than flows in?

If you spend just one more £1 than you earn each month, you will get further and further into debt. If you spend £1 less than you earn each month that is £1 extra put in reserve.

To achieve financial freedom in your life time you need to spend money only on necessities, and save for a later time, when you can afford to buy luxuries.

Actions:

1. Prioritise your debts – pay those carrying the higher interest rates first

2. Draw up a cashflow forecast – see how your money comes and goes each month over the next 12 months.

3. Prune all those “luxuries” you don’t need – e.g. possibly downgrade on your satellite or cable package, cancel that gym membership you never use.

4. Destroy those credit cards – only use cash for purchases – open a separate savings account for those large, one-off purchases you need to make each year.

5. Live by the mantra, “10% of all I earn is mine to keep forever”.

What else can I add to this list – please comment below.

Small Increases in Income Make a Big Difference!

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101-ways-to-make-extra-cash

When considering whether to move to a new employer, many feel that it is important to ensure that they maximise the amount of increase in income that they achieve.

Many would not consider moving to a new job for just £1,000 or £2,000 extra per year.

But it is the point of this article that a small increase in income can make a BIG difference.

When we consider the normal income and expenditure profile for a family we can roughly divide it’s expenditure into “fixed” and “variable”. An example of a fixed expense would be a rent or mortgage payment. It is generally fixed in relation to an increase in income – if you earn an extra £2,000 per year then generally you may stay living in the same property. A “variable” expense on the other hand is an expense which does or can change with income – for example – entertainment – if you’re earning more you may have a tendency to go out for meals, cinema, holidays more, therefore spending more on entertainment as your income rises.

So having considered this, we can see that all people have “fixed costs” and “variable costs” of living. The difference between total expenditure and total income is therefore what we like to think of as “disposable income”.

Having assessed your income and expenditure (see this article on cashflow forecasting) you will arrive at a figure for your “disposable income”.

For example, say your monthly take home pay, after tax and national insurance is £2,000, you have fixed costs of £1,200 per month and variable costs of £500 per month.

This gives total expenses of £1,700 per month and a disposable income of £300 per month.

Now let’s say for arguments sake that you could move to another job which earns you just another £100 per month after tax (£1,200 per year). Many would not consider taking this course of action, yet when we consider this in relation to your “disposable income” you have now seen an increase in your “disposable income” of £100 per month, from £300 to £400 – a 33% increase in disposable income!!!

This is an example of “leverage” where a small change in one variable results in a large change in another variable.

Now you might not get very excited about an additional £100 per month, but what if it was an extra £250, £500, or even £1,000 per month – what could you do with that additional income? I’m sure you could let your imagination run wild on this one.

Could you move to another job for an increase in income, or do something in your free time to earn more money????