Fix, Borrow, Save and Pay

7/27/2019 Fix, Borrow, Save and Pay

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Contents

Tricks to help you save ----------------------------- – page 2

Life insurance ----------------------------- – page 3

Should you switch policies? ----------------------------- – page 5

Five ways to lose when you borrow ------------------ – page 9

A good time to teach kids about money ----------- – page 13

Fix your finances and start saving money ----------- – page 16How to free yourself financially -------------------- – page 18

Get out of debt – fast ----------------------------- – page 20

Who needs cash ----------------------------- – page 23

Advice for those in serious debt -------------------- – page 25

Get the right advice for your home loan ----------- – page 26

How you can save £100 every month ----------- – page 28

This is the important stage – start a pension --- – page 30

Take years off your mortgage -------------------- – page 33

Insurance rates- easy ways to pay less ------------ – page 36

Successfully managing your credit card debt ---- – page 38

Holding a secret weapon ----------------------------- – page 40

How to get a low interest rate credit card ------------ – page 43



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Tricks to Help You Save

Start small.

For those never been able to get into

the saving habit, Paul Richard, vice-president of

the National Center for Financial Education in

San Diego, recommends starting by setting aside

at least a dollar a day in pocket change. “It will

become a habit if you do it every day,” he says.

After 30 to 45 days, open a savings account and

deposit your accumulated change monthly.

Eliminate the need for willpower.

If a raise boosts this year’s take-home pay, set up an automatic payroll deduction that shuttles the amount of

the increase-or even half of it-to a savings account, mutual fund or U.S. savings bond. Saving will seem less

like self-denial if you’ve never had your hands on the extra money.

Set goals.

A specific goal, such as saving for college tuition or for a down payment on a new car, is a better motivator

than saving for saving’s sake, says Judy Lawrence, a financial counsellor in Albuquerque, N.M. Determine how

much you need to set aside monthly to reach your goal. Treat that amount as a fixed expense, just like the

mortgage or the phone bill, or as a loan you’re obligated to pay off.

"On the other hand, a horrible savings device", says Richard, "is increasing your tax withholding and treating

that as forced savings." Getting a tax refund may seem like a windfall, but Uncle Sam has earned interest on

your money, and you haven’t.

Another tactic to avoid, says Lawrence, is cheating on your chequebook by rounding expenditures up to the

nearest dollar or by “forgetting” to carry forward a balance when you deposit a paycheck. People who have

trouble saving fool themselves about how much-or how little-money they have, she says. Playing games with

your chequebook just compound the problem. You never really know your balance. Later, reconciling the

account becomes a nightmare.

A final motivation: Figure out how much you stand to lose by putting this resolution off for another year. If

you’re 35, £50 a month at 8% will grow to £74,518 by your 65th birthday. If you wait until next year to get

your savings account started, the pot will be £6,286 smaller.

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Life Insurance – No Surrender

However bleak the January weather, the

financial world’s hot gospellers will be out on

the roads, producing life insurance to save

families from the wrath to come. Only life

insurance men portray a sales drive as a moral

crusade, and the pressure can be wonderfully

unsubtle.

Those searing tales about the man who died,

leaving his wife destitute because he had never

got round to taking out a policy, are only the

nursery slopes of moral blackmail. The unspoken pressures can have far more impact. One American broker

used to work from an office overlooking a cemetery, and potential clients would be shown up to his office,only to be told that he would be a few minutes late. They would then wander over to the window to where a

burial always happened to be in progress – at which point the broker would appear. He claimed that he never

missed a sale.

A life company always resents a good deed protecting people from the consequences of their own

fecklessness – and providing them with funds in old age. That may be true enough, at least with the first

policies they buy. But all too often people cancel one life policy to take on a second, and do very badly in the

process. Addition is fine, but substitution is a disaster except, of course, to the sellers.

Banks, building societies, estate agents, insurance brokers and salesmen are all keen to sell life insurance. The

time when there is greatest pressure to change policies is when you move house. Buyers may findendowment mortgages good enough when they move on to the housing ladder for the first time, but the big

scandal comes second, third and fourth time round, as they find themselves taking out new life insurance

contracts to go with the new mortgage.

The problem is real enough. People in Britain lose [British pounds] 680 million a year from cashing in old

policies and taking out new ones, according to the Institute of Insurance Brokers. Why do they do so badly?

Partly because life insurers load all their charges for commission, administration and life insurance at the

start of the policy. These can absorb the first year’s or even the second year’s premiums – and if you cash in a

policy within that time you will very rarely get anything back. The other still more basic point is that the more

recent the policy, the less money there will be in it because it has had less time to grow.

But there is even a snag to cashing in life policies that have been running for some time. If the contract was

up and running before March 1984, tax relief helps with the cost of the premiums. But that certainly does not

apply to any policy starting now, which will be more expensive anyway – if only because the people taking it

out will be that much older.

All too often people assume that if they run into cash flow problems, surrendering or cashing in a life policy is

their only option. If they have to cut back their spending, the more profitable way to do it is to make the

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contract paid up. This ensures that they do not have to pay any more towards it, but the money already in

the policy continues to grow and provides at least some limited benefits. Alternatively, most insurers allow

you to borrow money against the contract’s cash-in value, if you have a with-profits policy. Interest rates vary

from company to company, but can often be lower than those you have to pay elsewhere. Usually the

interest the insurers deduct ticks up, and both the original loan and the interest due on it are deducted from

the proceeds when the policy matures.

If you use the money for business purposes, there is tax relief on the interest you pay – subject to one caveat.

The crucial point is that you actually hand over interest regularly rather than letting it roll up. Whatever

happens on that score, banks will often provide overdrafts on slightly better than average terms, if you can

secure them by providing a life policy as security. But, clearly, if the policy is pre-committed to paying off the

mortgage, that is not an option.

Auctioning the policies provides the highest cash returns, though they will vary from policy to policy and

auction to auction. Foster and Cranfield, based in the City, are the great auction specialists, and have been in

the business of selling reversions since 1843.

Most people put a reserve on the policy. If the final bidders will not offer more than the cash-in value that

the insurers themselves provide, it is withdrawn from the sale. Foster and Cranfield will take as a fee one-

third of the difference between the price for which you sell and the insurer’s surrender value. Even after

paying those expenses, people can broadly expect to collect 30% more than they would get from

surrendering the policy. The one snag is that the auctions only cover with-profits policies and not those which

are unit linked.

Doubtless the life insurance men will continue to sell policies, stressing that Britain is massively under-

insured. But new policies for old make matters worse. Raising money against the security of a life policy is

easier than it looks, and far more sensible than cashing in the assets. If that has to happen, auction – not

death before surrender should be everyone’s motto.



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Should You Switch Policies?

Should you drop your present insurance and buy a

cheaper kind or one of the newer types of

coverage? That’s a proposal an insurance agent

may make to you, but the odds are it wouldn’t be

a change for the better. Still, you ought to

investigate. A significant number of policyholders

do benefit from changing or updating their

coverage.

The life insurance industry’s best-selling and most

profitable product, whole life (also called straight, ordinary, permanent and cash-value life), has been widely

assailed as costly, complex and inflexible. Whole life combines insurance protection with a savings program.

For years critics have charged that consumers are kept in the dark about the true cost of such policiesbecause insurers refuse to disclose rates of return on the savings component in any meaningful way. In 2010

a Federal Trade Commission study concluded that rates of return averaged 1.3% in 2007, a figure heatedly

disputed by the industry, which claimed the actual rate was 5.9%.

After that report sales of whole life fell precipitously. Although it retained its lead in sales volume, insurers

began developing better-paying variations of it, such as universal and variable life (see the box on page 38). A

few marketers made a big push for term insurance, which provides the most protection per premium dollar.

Competition has become intense as companies aggressively promote the various options.

“If we can’t quote you either greater benefits or lower costs, we’ll pay you £100,” asserts the ITT Life

Insurance Corp. in nationwide advertising. In newspaper ads trumpeting its “interest-sensitive” policies, theExecutive Life Insurance Co. admits that until recently most life insurance “was a terrible buy.” The Guardian

Life Insurance Co. proclaims a 13.25% dividend rate.

The explosion of whole life policies being replaced with other types of life insurance has evoked concern

inside and outside the insurance industry. High-pressure selling, misrepresentative policy terms and failure to

provide consumers with comprehensible policy comparisons are said to be fairly common.

“Most of those who are induced to give up their old dividend-paying policies in favour of new ones suffer

serious financial harm,”

Says James Hunt, director of the National Insurance Consumer Organization (NICO), an advocacy and

education group. The New York State Insurance Department declares that replacement is “usually not

advisable.” Among the reasons:

Because you’re older, the premium payments for the new policy would likely be higher.

You would again have to pay the cost of taking out a new policy.

Most new policies provide for a two-year period of contest-ability, during which the insurer could refuse

to pay the benefit for certain reason, such as death caused by a pre-existing ailment.

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Your present policy may have superior settlement options, disability provisions and other terms.

Dividends from many policies have been rising and may continue to –lowering, in effect, the cost of

insurance to policyholders. (Some insurers now offer to increase dividends if policyholders will agree to

limit their borrowings or pay higher rates when they borrow.)

If you’re typical, your overriding purpose in buying life insurance is to assure those closest to you of financial

resources in the event of premature death. When the first policies were sold, about 250 years ago, that was

the only purpose. People calculated how much they wanted or could afford and bought it. There were,

however, a couple of potential drawbacks. Depending on the type of policy, the premiums rose or the

amount of coverage decreased as the policyholder got older, and the policies terminated after a specified

period of time (hence the name term insurance).

The Drawbacks of Whole Life

Whole life was developed as an answer to some of the problems with term insurance. Its savings-accountfeature meant premiums could be kept level, the policyholder could retain the insurance for life (hence its

name) with no increase in cost and could also borrow against the cash value at preferential rates.

However, those innovations have a price –much higher premiums. Buyers of whole life have to pay more or

settle for less protection than term offers.

Term insurance is widely recommended, especially for younger families who need a lot of coverage. For

example, the New York Life Insurance Company’s rates for £100,000 in coverage for a 35-year-old male non-

smoker are £144 per year for annual renewable term and £1,482 for whole life. But should you drop a whole

life policy and substitute term? If you need more protection than you can afford, by all means look into term.

It will be up to you to find the best buy, though. Chances are an agent won’t recommend a cheap term policybecause the commissions are too small.

You’ll need a sophisticated analysis to know for sure whether any kind of replacement–term insurance or a

higher-yielding version of whole life –would be advantageous. A formula for doing this has been developed by

Dr. Joseph Belth, professor of insurance at Indiana University and editor of The Insurance Forum, a

newsletter. The formula provides benchmarks against which you compare yearly prices per £1,000 of

protection. The math is rather complex, and it won’t work for policies that require extra premiums because

of health impairment or other problems or those that insure more than one life. Belth says the biggest

obstacle may be getting the necessary data from your insurance company. If you have trouble, complain to

your state insurance department.

An agent should be able to run a computer-assisted comparison for you, but be sure to get everything in

writing. Or NICO will run a comparison for £25. For information, send a self-addressed, stamped envelope to

NICO, 344 Commerce St., Alexandria, Va. 22314.

NICO recommends this general rule: If you have a “participating” policy–one that pays dividends –keep it. If

it’s non-participating, replace it. There are exceptions. For example, if you have several small dividend-paying

policies, it might be better to replace them for the sake of efficiency.

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Most policies pay dividends, and insurers have been able to increase them for several reasons. High-tech

modernization has lowered their operating costs. Their policyholders are living longer, so they are paying

proportionally less in claims. And higher interest rates are giving them better yields from the money they

invest. An industry index based on fairly typical policies sold by selected companies shows consumers are

paying 32% less for whole life, on the average, than in 1960.

A policy that would pay better dividends than one you bought several years ago would not necessarily be a

better deal. You’ve already paid the sales and underwriting costs for the old policy; most of the premium

money for the first year or two went for that. You’d have to pay those charges all over again for a new policy,

so there would be no cash build-up for a while.

On the other hand, change could sometimes be advantageous. Examples:

If the cash build-up on a new whole life policy would be substantially greater and would begin

reasonably soon;

If you want more protection than an existing whole life policy provides but wish to minimize your

premium costs (to pay the premiums on term insurance, you could borrow against the whole life cash

value, usually at below-market rates, or withdraw the money and make income-producing investments);

If you have term insurance and find you can get it for less from another company, along with comparable

renew-ability and conversation guarantees.

Before You Switch

If you have an older whole life policy, ask your insurance company whether it has un update or exchange

program or is planning one. A small but growing number of insurers will sweeten or replace existing policies

at little or no cost to the holder.

These safeguards can help if you’re considering a change:

Be wary of any agent who disparages all whole life of belittles your present insurance without

demonstrating convincingly that his or hers is better.

Avoid agents with little experience.

Show any proposal you receive to the agent who sold you your present policy. Your agent will be only

too happy to point out any flaws or discrepancies in the proposed policy.

Make sure any new policy will take effect before your old one expires.

Insist on a written replacement illustration showing where you would stand with each policy at various

times in the future, and ask the agent to sign it and also to state in writing that the change will benefit

you. (About 40 states have specific regulations governing replacements, and 13 of those require insurers

to provide comparison statements. The insurance department can tell you about the legal situation in

your state.).



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Ask how much you’ll have to pay for the acquisition costs.

See how the loan rate compares with the policy you have.

Find out when the next dividend will be paid if you have participating whole life. It may be smart to wait

until after that if you decide switching makes sense.

If you want to check on an insurance company before you switch, ask at your library for Best’s Insurance

Reports, an annual publication that profiles about 1,800 life insurance companies and rates them according

to financial strength. It also gives information on their management and product lines. Best’s Flitcraft

Compend, which an insurance agent can show you, has descriptions, rates, dividend scales, cash values and

other data about some 300 companies.



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5 Ways to Lose When You Borrow

If you’ve been borrowing more than you did a few years ago, consider yourself one of the crowd. After

postponing major purchases during the high interest days of the recession, consumers have been buying

more on credit. But many people are playing the borrowing game without knowing all the rules and may be

making mistakes that could translate into hundreds or thousands of dollars. Below are five such errors –and

tips on how to avoid making them yourself.

Choosing a Long-term Loan

Shortening the length of your loan will increase your monthly payments, but it will also decrease your total

finance charge. Say your local bank is offering automobile loans at 15% and you’re borrowing £10,000. You

can choose between loans with payments of about £485 for 24 months, £347 for 36 months or £278 for 48

months. The 48-month loan will cost £1,722 more than the 24-month loan, about 17% of the principal

amount, and £879 more than the 36-month loan.

Many people unwittingly run the risk of stretching out

their payments by choosing variable-rate installment

loans, a new borrowing option. Interest might be

pegged to indexes such as certificates of deposit or

three-month Treasury bills. Instead of altering your

monthly payments, however, the bank stretches out

the loan term if rates go up and shortens it if rates

drop.

Banks are pushing variable rates because they protect

them against getting stuck with low-interest loans on

their books. They can be a good deal for customers,

too –but only if rates drop or hold steady.

Assume you’re taking out a 48-month adjustable-rate automobile loan for £10,000 and the initial interest

rate is 14%. That puts your monthly payment at £273.27. If your rate goes up 1/2% a year, you will owe one

additional monthly payment. If it goes up 1% every year, you’ll stretch your payments two more months. But

if if goes up 5% soon after you take out the loan, you’ll wind up making four additional monthly payments. Of

course, the opposite could happen. If rates dropped 1% each year, you’d end up making only 46 monthly

payments.

The fact is, you’re playing a game of interest-rate roulette. And the longer the term of the loan, the higher

the stakes.

Some banks are now offering variable-rate loans at 1% or 1 1/2% less than comparable fixed-rate loans to

attract customers. But that may not last long. “More and more people are choosing variable-rate loans,’ says

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Bill Handel, director of research at Whittle & Hanks, a bank consulting firm in Chicago. “In a few months,

these discounts may narrow and disappear.’

Not Building a Credit History

This is a special concern to women, who only ten or 15 years ago faced a maze of obstacles when they tried

to obtain credit based on their own income. A good first step toward building a credit rating is to apply for a

retail store card. If you’re a married woman and want to build a credit history that is unquestionably your

own, get an “authorized user’ card for your husband instead of opening a joint account. That way, the

account will be in your name and based solely on your income.

Using Higher Cost Loans

Obviously, you want to check the market for the lowest rate. But the rate depends to a large extent on thekind of loan you obtain. Borrowing against assets you already have is probably your cheapest source of

financing. There are several ways to go about doing it.

Home equity loans. Many banks and other financial institutions will offer you a line of credit at favorable

interest rates if you’re willing to pledge the equity in your home as collateral. Since you stand to lose the roof

over your head, you should consider such a loan only if you’re in stable financial shape and can keep a tight

rein on your borrowing.

Securities. You can arrange a margin loan through a brokerage house, but you’ll have to place stocks and

bonds in a special account as collateral. Under Federal Reserve Board regulations, you can generally borrow

up to 50% of the market value of common and preferred stocks in your margin account, up to 70% of themarket value of corporate bonds and up to 90% on government securities. There are no loan applications to

fill out and no fixed repayment schedules. The interest rate commonly is up to two percentage points above

the current broker call rate (what the bank charges the brokerage firm for money).

The catch is that in most cases brokers will require that 30% equity be maintained in your account at all

times. If your securities drop sharply in value, you may be required to put up additional collateral. If you

can’t, the broker could sell securities out of the account.

To avoid that, don’t borrow the maximum amount. Take a loan of only 10% to 25% of the value of stock in

your account, rather than 50%. It would take a 70% or 80% decline in the value of your securities to force a

margin call if you borrow modestly.

Margin interest paid is deductible up to £10,000 per year against ordinary income, but margin interest on tax-

exempt municipal bonds is not deductible.

Life insurance. On older policies the interest on a loan against the cash value could be as little as 5%, on new

ones often 8%. You are under no obligation to repay the principal, and the interest can be added to the loan.

However, your insurance protection will be reduced by the amount you owe. Any interest you pay when due

may be deductible if you itemize.



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Pension plans. Some companies allow employees to borrow from their pension or salary-reduction plans. The

loan is limited to 50% of your vested benefits, to a maximum of £50,000, and it must be repaid within five

years except when the money is used to acquire or rehabilitate a principal residence. The rate of interest is

set by the company and is tax-deductible.

Not Challenging Errors

Errors sometimes creep into the credit files that loan officers rely on for rating loan applicants’

creditworthiness. If your loan application is rejected, ask which credit bureau the lender used and request a

summary of your file to make sure it’s accurate. If the request is in connection with a credit refusal made in

the past 30 days, you do not have to pay for the information.

Ideally, you should check your file every few years, sooner if you have moved or changed your name. Head

over to our Credit Report section for more information.

Skipping the Fine Print

The federal truth-in-lending law governing consumer borrowing requires lenders to provide a clear

explanation of the charges involved. Your yearly borrowing cost must be quoted as the annual percentage

rate. That APR takes into account loan fees, finders fees and interest and is the most accurate way to

compare lending rates. But bear this in mind: Some costs, such as applications and late payment fees, are not

included in the APR, although they must be itemized in the loan documents.

Despite legal safeguards, you still have to be on the alert. What happened to Carlton and Ada Poston is a

“worst case’ example, according to Bryan Ross, their attorney. A few years ago they took out a loan for theirtrucking business from a lending company. The couple was told that they could borrow about £25,000,

payable at 12% interest per year. The loan was secured by their Washington, D.C., home.

At settlement, the Postons signed several documents. What Ross says they didn’t realize–and what he says

was never explained to them –was that the loan note was for £28,750, discounted by £5,750 and payable in

full in one year. Since they received only £23,000, their actual borrowing rate was more than 40%, he says.

Unable to repay the note, they refinanced it twice, once through another lender, adding to their debt. At one

point they were charged an effective interest rate of 100%, according to their attorney. Finally, their note for

£58,400 was purchased by a savings and loan association, which started to foreclose after about a year but

later worked out a repayment plan.

The truth-in-lending law didn’t shield the Postons because the loan was for business purposes, and business

loans are not governed by truth-in-lending and generally not by state rate ceilings. For those reasons, says

David Medine, director of the George Washington University consumer legal clinic, “consumers should be on

guard against lenders who encourage taking out a business loan when it’s really for personal use.’

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The Postons compounded their mistakes by using their home as collateral. That’s risky thing for anyone to do,

particularly in jurisdictions with lax foreclosure laws. In Washington, D.C., a creditor generally does not have

to go through court proceedings to foreclose on a house.

The Postons tripped on still another legal point. When a principal residence is used to secure a loan (with

some exceptions, such as a mortgage loan), you have the right to rescind the agreement within threebusiness days. Among the documents the Postons signed was a waiver of that right.



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A Good Time to Teach Kids About Money

The summer is officially over. No more vacations and summer camps. It is back to school for kids and

teenagers. This is also a good time to teach kids how to deal with money. Despite a quickly

changing money world, with the Internet, online banking, and

other new ways of doing business, the fundamentals of what

you need to know about money will stay the same.

Teaching children at an early age the value of money can reap

rewards for them and for you –especially when your kids

become young adults. Here are some suggestions for helping

your children understand the relationship between money that

comes in and money that goes out.

Grade School

Weekly allowances are a good way to start a child’s financial education. They can help kids develop a sense of

responsibility for “their money.” Even a modest amount given to a child each week can encourage kids to

discover the value of money. It helps them to understand that the allowance can buy things they need, and

that there is a limited supply.

The routine can teach children the importance of saving if they wish to buy something that is more

expensive. By doing a little bit of math, children can figure out themselves how long they will have to wait for

an extra reward.

Saving can also be fun! Putting money in a piggy bank is the first step to a savings account.

For birthdays and other special occasions even young children are often given some money from relatives.

These are good opportunities to start a savings account in a child’s name. Now, the child can take his or her

savings from the piggy bank to the real bank, as well as learn about interest rates and the value of time. It will

also make children feel more independent and grownup if they have accounts in their own names.

If you think your children are getting too many toys or expensive items as Christmas or birthday gifts, suggest

to close relatives that they might instead consider giving savings bonds. Then, if a savings bond is given,

explain to the child how much the savings bond is worth now, and what it will be worth in the future. Keep

the bonds in a safe place and provide your child with a record of the amounts.

In addition to teaching kids about the importance of saving money, you should also teach them how

to spend money wisely. Taking kids to the supermarket can be a daunting task but also a good teaching

opportunity. Get your children to help you comparison-shop for a few items. Read the shelf labels on, for

example, several brands of canned tomatoes, and ask your kids which are the least expensive for the same

size.

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Kids at this age can even learn a bit about earning money. If there are extra chores that kids can perform

around the house, then you can reward them with additional pocket money. Tasks that need to be done on a

regular basis are especially useful for developing a sense of responsibility and reward: If the tasks are not

done on time, then no extra money!

Junior High

Continue allowances, but adjust them upward. If you have not done it already, tie allowances to performing

certain household chores. For big household tasks –e.g., cleaning the basement –consider paying “wages” to

your child. Encourage continued and regular savings-account deposits –from allowances and from

“extra” money.

The junior-high years are also a good time to encourage kids to think about the difference between what

they need and what they want. Since almost everyone wants more than is actually needed, it is important for

children to learn the difference. Explain to them that things like food and housing are essential needs, while

other items –such as the newest T-shirt featuring a favorite sports team –are not.

Even if you can afford to provide much of what your children want, it might be a good idea to teach them

that one day they will still have to make trade-offs. If your child wants you to buy that new shirt, consider

giving up some other wish. Giving children choices can help them learn to set their priorities.

High School

High school can be a challenging time for parents. Peer pressure exerts more influence at this stage and can

change priorities for teenagers. Their desires –e.g., clothing, dates, and cars –can also become more expensivefor parents.

Sometimes it is better to talk about these potential conflicts before they arise. Take the time at the beginning

of the school year to brainstorm with the teenager to discuss expected needs during the year. If you are

going to provide an allowance, talk about the amount, what it is expected to cover, and whether any regular

household tasks will be done in exchange.

Reinforcing values linking money to work –either at home or outside –can be particularly important for

teenagers.

Many teenagers hold part-time jobs while they are in high-school. This can be a good experience and

important preparation for their future work life. It also helps teenagers to save and buy things they value

highly. It can be helpful to introduce them to more alternatives regarding their savings. With college and

other opportunities in sight, teenagers often understand the value of saving money they worked hard to earn

so that they can receive the benefits later. Making regular savings deposits is an important habit that will

help them along.

However, it is important that teenagers do not neglect their school work. Too many hours on a part-time job

during the school year can cause problems in school. While it might be tempting for a youngster to achieve







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an immediate financial goal –e.g., buying a used car –it is important to explain the consequences of neglecting

studies, which can cost a lot of money in the future. Bad grades can limit opportunities for scholarships and

college entries.

Even giving a loan to a teenager can be a learning tool. If the teen has an eye on something that extends

beyond current means, a loan from his parents may be the answer. If your teen asks for a loan for a majorpurchase, and you’re willing and able to provide it, consider setting up a “loan agreement,” with payments

and due dates specified.

Usually children learn how to handle money from examples set by their parents. You can give your child a

boost toward becoming a good money manager if you manage your money well yourself. Involve your

children in the family’s financial decisions, such as planning a vacation within a certain budget. Also, if the

family is having financial problems and needs to cut back on expenditures, bring your children into a

discussion of the options.

Students and Credit Cards: Even after high school children often need financial support from their parents,

especially if they continue their education and go to college. Many parents choose to provide students with

credit cards for emergencies, or to ensure that a temporary lack of cash does not turn into an unnecessary

crisis.

However, before turning over a credit card to a teenager, parents should make sure their kids understand the

implication of buying on credit. Especially important is to explain that missing payments can add dramatically

to the costs of credit cards and put a bad mark on their credit records. Explain to teens that buying something

on credit does not mean they can defer payment for a long time.

Having a credit card can help educate young people about the importance of a good credit record. If your

teen shows responsibility in using a credit card, this can establish a good track record of using credit, which

can be helpful in obtaining a loan after college or buying a first house.

Teach teens what to do if their credit cards are stolen or lost. Being prepared for such an eventuality can help

lessen the damage and the stress. Also, you should teach your children the significance of protecting their

credit cards and personal information. Even simple rules, such as making sure not to leave the credit card

receipt in the store, and not giving out your credit card number to unauthorized persons, can reduce the

chances of disaster.

Credit cards are often used to buy goods and services over the Internet. Many teenagers are more

comfortable and knowledgeable about computers and the Internet than are their parents. Still, you should

remind your teens to be responsible while using credit cards on the Net. Following sensible procedures such

as making sure to deal only with legitimate Web sites, checking credit card statements, and not providing

credit card information through e-mail should become second nature for the young user.

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16

Fix Your Finances and Start Saving Money

Perhaps you have a stack of credit card bills and an empty savings

account. Unfortunately, hoping to win the lottery isn’t the path to

financial recovery. It’s time to set up both a healthy spending

strategy and a plan for decreasing your debt over the next 12

months.

A healthy financial profile is like a successful fitness plan that

helps you feel good about yourself. You’ll transform the thrill of

spending money into the thrill of having money!

Map Out Your Spending.

Start now by recording your daily expenditures. Jotting down each expense will make you conscious of your

spending, giving you a better feel for how you divvy up your paychecks. Next, take stock of your yearly

expenses, including rent, food, insurance, bills, entertainment and special spending like birthday gifts and

vacations, then determine what’s most important to you and where you can economize.

Pay Attention to What You Buy and Why.

Don’t allow shopping to become your form of therapy. “People get a rush from spending money,” says Claire

Debattista. Take a list with you every time you go shopping, and stick to it. If you see an item you want that’snot on your list, give yourself a few days to think it over. Ask yourself why you’re buying a fifth pair of running

shoes: Because you need them? Or because the purchase makes you happy?

Take Control of Credit Card Debt.

“Every financial planner will tell you the fastest way to decrease your credit card debt is to pay as much as

you can on the bill with the highest interest rate, and pay the minimum on the others,” Fowles says. Also,

look out for red flags: Only paying the minimum on your credit-card bills, maxing out two or three credit

cards, being denied credit or not having any savings are all indicators that you’re headed toward risky

financial territory.

Sort Out Your Credit File.

Get a copy of your credit report and make sure the information is correct. Any mistakes could be impacting

your credit score, which in turn affects the rates you get.

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Consolidate Your Payments

If you haven’t consolidated your loans, do it now before interest rates rise.

Create an Emergency Fund.

While it’s most important to pay down credit-card debt first, the next step is to have an emergency fund. Try

to deposit about 10 percent of your income in a savings account each month, and don’t touch it. You’ll be

glad you have the cash when your transmission clunks out.

Seek Help.

If your debt has become unmanageable, don’t ignore it and hope it will fade away. The sooner you act, the

better!



18

How to Free Yourself Financially

For years, you’ve been telling yourself you’d stick to a

budget, pay off your debts and free yourself from

financial worry.

Yet, somewhere along the way you allowed yourself to

get sidetracked. But today is a new day, and armed

with a new set of rules, you can begin to make life

changes that will result in a wealthier, healthier, and

more profitable you.

Get Organised.

Monthly bills, installment agreements, correspondence from creditors, receipts, check stubs and cancelled

checks should be organized, filed and stored neatly in an accessible area. “I recommend a portable file

storage cabinet where you can organize, alphabetize and store necessary information at your fingertips,” says

38-year-old East Coast finance executive Yvette Jamison.

Create A Budget And Stick To It.

Most people start out with a budget, but after a few trips to the ATM, or unexpected expenses, they find that

they have already exceeded it. “Write down your goals, create a budget that supports them, and makeallowances for unexpected expenses,” says Tameka Johnson, 32-year-old business manager in Chicago.

Make A Plan For Your Debt.

Debt is a part of life and it’s usually not the problem, it’s how we respond to it. Some financial experts

suggest starting with the smallest debts first, paying them off, and using whatever is left over to pay toward

the next obligation. In this manner, you are continually decreasing expenses while creating a method of

discipline that is integral to wealth-building. “Some people plan meticulously for a two-week vacation, yet

don’t thoroughly educate themselves about making lifestyle decisions that affect their whole future,” says

Marilyn and Tom Ross. The key, experts say, is to take control of your debt and not let it take control of you.

Live Within (Or Below) Your Means.

The art of long-term growth begins with a change in lifestyle. “Many people can be publicly successful and

privately complete failures,” says T.D. Jakes, author of The Great Investment. “Many people spend hundreds

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of dollars on the latest imported suit and fine-skin shoes, only to struggle to scrape together the money

needed to keep the lights from being cut off or the eviction notice from being delivered.” Living within or

below your means, therefore, means taking an honest evaluation of your resources and living within the

parameters of those financial boundaries.

Commit To Saving.

Although it may seem that there is little to spare, setting aside a monthly amount is an important step to

establishing a firm financial foundation. Begin by saving a three-month cushion (an amount equal to three

months’ worth of expenses) and then branch out into other saving vehicles. “From 401(k) accounts to IRA’s,

mutual funds and educational accounts, saving money not only solidifies your financial footing, it provides a

necessary source of support in the event of an emergency,” says Tameka Johnson.

Stay In Control. Keeping a clear-cut goal in front of you is half the battle of getting there. “Remind yourself frequently why

you’re trying to get out of debt,” says Gerri Detweiler, Marc Eisenson & Nancy Castleman in Slash

Your Debt: Save Money and Secure Your Future. “Whether your goal is to provide for college tuition, create a

more secure financial future or carefree retirement, think about how much more money you’ll have once

those debts are paid. Then, decide how you’d like to spend, or better yet, invest the extra money.” Keep in

mind that your goal is to free yourself from financial worries and pressures while improving your wealth-

building abilities.

Creating a financially independent lifestyle doesn’t happen overnight, but with time, discipline and a

commitment to change, you can see the beginning of a wealthier you.







20

Get Out Of Debt – Fast

Financial planners often say it takes pain to prick people into action. So what do you do when you max out on

your credit and suddenly realize you’re in trouble?

You can dig out of debt faster than you think, if you attack it in an organized way. Here’s a seven-step

rehabilitation program:

List Each of Your Loans

Including how much you owe (most people don’t know), the minimum monthly payment, the gross interest

rate, and the rate after-tax (the interest on home equity loans, mortgages, and certain loans against

securities is tax deductible if you itemize on your returns, but not the interest on other loans). Then total it all

up.

Restructure Your Debt

With the goal of reducing interest. You can transfer credit card balances to lower-rate cards. Or consolidate

consumer loans on a credit union loan or home-equity line of credit (provided you won’t run up your credit

cards all over again). If you ask, the card issuer may lower the rate and the annual fee, especially if you say

that you’re planning to switch to another card.

Make One-Shot Reductions in Your Loan Balances.

For example, run a yard sale and use all the proceeds to pay off debt. Sell off a few shares of stock you

inherited. Use your savings, if you have any. It’s smarter to chop debt than to hoard money in a savings

account. (But keep adding to your individual retirement account at work, because those contributions lower

your taxes.)

Pay the Monthly Minimums on Your Low-Rate Loans

While putting the rest of your available money toward the highest rate loan. The faster you knock off high-

rate debt, the faster your burden will decline.

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Increase Your Monthly Debt-Reduction Budget

Even if it’s by only a small amount. Say you owe £3,000 at 18 percent interest, on which you’re paying the

minimum – £60 a month. It will take you 30 years and ten months to get out of debt. If you add just £15 to

your payments, you’ll be out of debt in five years and three months – and save an enormous £5,759 in

interest.

Keep on Paying The Same Amount Each Month

Even though your loan balance goes down. The faster you pay off principal, the more interest you save, and

the faster your total debt declines. Once you’ve erased the highest-rate loan, start on the next highest – still

paying the same fixed amount.

Work Your Way Down the List, Debt by Debt.

To be successful, you have to take pleasure in the process, says planner Denise Leish of Money Plans in Silver

Spring, MD. Post your payment schedule on the refrigerator and check off each one. Or give yourself a

quarterly reward for staying on the wagon.

If your debt is too big to handle by yourself, or things

have already reached a such a stressful point that it’s

difficult to take on by yourself you can set up a Debt

Management Plan and contract a team of

professionals to negotiate with your creditors to lower

payments.

You don’t have to wait until it hurts to reduce

your debt. Instead, train yourself not to borrow

anymore. Say to yourself, “Today, I am not going to

put down a charge card for anything.” When you buy

something, pay cash, use a debit card, or write a

check. Tomorrow, say the same thing: “l am not going

to put down a charge card for anything.” Take it

slowly, one day at a time. It’s like giving up smoking.

You’ll be nervous at first; you won’t see how it’s

possible to live; you’ll suffer relapses and sneak a debt or two. But when you get up every morning, renew

your pledge. Check off each successful day on your calendar.

To make it easier, quit carrying credit cards. If you have to use cards for business purposes, deduct each

expenditure from your check register – just as if you had written a check – and pay the full debt at the end of

each month.

Of course, no debt reduction program will work unless your overall spending is under control. When

discussing budget matters with your spouse, neither of you should propose a spending cut for the other,

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advises planner Faye Kathryn Doria in Rochester, NH. Instead, match each other’s offers. If you agree to save,

say, £25 a week on clothes, your husband should find a specific £25 he can cut from his personal budget. Get

your children to stop asking for stuff, not by scaring them into thinking you’re broke but by talking about the

value of improving your financial position.

For hard-core spendaholics, Doria has an idea I love. Freeze your credit cards in a block of ice. Then, whenyou get desperate and you’re standing at the sink running hot water over the block, you’ll have plenty of time

to reflect on your financial priorities.



23

Who Needs Cash?

As good as gold and better than money. That is the main marketing

thrust of the growing army of voucher-issuing companies, ranging

from high street store groups to the travel trade and from brewer to

bank.

They argue that vouchers have a psychological value which

transcends that of cash when employed as premiums, incentives

and rewards. Mere money, they contend, simply gets swallowed up

in housekeeping and routine spending, leaving no pleasurable

memory of a special purchase or treat.

Unlike banknotes or cheques, vouchers can cost less than their face value. If purchased in quantity, they can

attract discounts from many of the issuers. Some (a minority) only charge for the vouchers after they have

been redeemed. When employed in staff-incentive schemes, vouchers do not at present attract the National

Insurance contributions on their value that would be the case with cash.

Many issuers track where and on what the vouchers are spent, passing the information on to promoters, if

requested, so they can assess the geographical response to a campaign and what types of products or

services have found most favour.

“Cash is convenient, but it is no substitute for excitement” - Graham Povey, operations director of Capital

Incentives

Capital Incentives is a subsidiary of the Bank of Scotland, and issues Capital Bond multi-option vouchers,

which are accepted in about 20,000 retail outlets.

“There are various reasons why cash is not the best incentive to use in a motivation programme. Vouchers

have the flexibility of cash without the disadvantages. Cash has no identity and quite often it is just a line

on somebody’s salary slip. Even if it is a separate cheque, it finds its way into the same bank account used

for the household budget, with no thought for why it was awarded.”

He points out that the recipient of a voucher award has to make a conscious decision about how to spend it.

Whatever is purchased is remembered as being the result of a particular incentive.

At Whitbread Leisure Vouchers, says general manager Bill Brown, “the appeal is to people’s lifestyle, not their

shopping baskets. There is a ‘treat value’”. The vouchers can be redeemed at Whitbread’s chain of

restaurants, hotels and off-licences.

According to Brown, his vouchers are in increasing use in consumer promotions. An extension is as a

substitute for on-pack money-off offers, with the voucher actually printed on the pack.

One potential problem here is security. The production of most vouchers is at security printers, which

specialise in banknotes and bonds. They contain complex graphics and codings, often including a hologram,

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both to circumvent entrepreneurial duplication on today’s sophisticated colour copiers and to enhance their

perceived value.

Generally, for security and identity reasons, the voucher companies will not personalise their products with

the name or logo of the brand employing them. Instead, they offer branded wallets to contain the vouchers.

The list of high street retailers providing their own vouchers is a long one. It includes Argos, Asda, Boots,

Burton, CWS, HMV, House of Fraser, Kingfisher, Marks & Spencer, Next, Olympus Sports, Safeway,

Sainsbury’s, SVS Storehouse (Bhs and Mothercare), Tesco and Victoria Wine.

For promoters who do not wish the offer to be tied to a specific group, there are several which, like Capital,

provide multipurpose vouchers.

Virgin brings in outside partners to add further choice to its own wide-ranging, airline-to-music operations. As

well as being exchangeable at some 25,000 shops and stores, the BonusBond of Grass Roots can be used to

buy direct from a catalogue and there is even a helpline for sourcing difficult-to-obtain products or services.

One newcomer to the field, Active Leisure, provides a long list of indoor and outdoor activities for which its

vouchers can be utilised.

Argos Business Solutions offers permutations from points collection to product-specific schemes, as well as

conventional vouchers for its shops and catalogue.

High Street Vouchers, part of the Park Foods group, has its own participant retailers, covering 3500 outlets.

And if you are still stuck for choice, the Voucher Shop issues ‘cheques’ which are exchangeable for – yes,

that’s right – vouchers.



25

Advice For Those in Serious Debt

You may remember a tragic court case in the late 90′s

concerning a mother who killed her two children

because of her debt. The burden of debt and the

stress it caused was the time-bomb that was waiting

to go off. Debt affects all sectors of our communities

and across the full social class.

When the debt is coupled with other problems within

the household as in this sad case then the

consequences can be catastrophic.

The Wallet Doctor is aware through its network and

membership that many people have considered

suicide at some point due to their debt problem.

Finance is available to take out almost anything. Is it any wonder that people take on the credit being

offered?

However, many people take on credit not for the desire of material items such as holidays or cars. Many

people need to borrow to live, to clothe themselves and their children.

The case in question has identified that Janice Miller was under pressure due to debts for a gas cooker and

other various items bought through catalogue companies. Many people will not realise that this is a common

occurrence. While credit is available to many, it is restricted for others. If you are employed you may have a

choice of where you can obtain credit; people on benefits don’t have the same choice.

Janice Miller as we know had many problems. Her marriage had ended, she had to be rehoused, and her

world had fallen about her. The letters or actions in connection with the debts were just too much to take.

Many people do feel the same way but don’t take the same action as Janice Miller. Many people are paying

their debt, sometimes with difficulty.

A change of circumstances that affects them and any income can cause problems. A separation, childbirth,

redundancy, illness are some examples. What can be done to help?

Without a doubt people need to ask for advice about their debt problems. Many people think that

the debt problem they have must be the worst in the world. It isn’t! Specialised money advice service is

available to everyone through our connections with third parties.

If anyone needs assistance regarding any debt problem can contact a specialist using the form on this page.

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26

Get the Right Advice for Your Home Loan

With Tesco, the Post Office, Marks & Spencer and

many more clambering to sell you a mortgage, thereare more places than ever to pick up a home loan, but

make sure you understand whether you are

receiving advice or a sales pitch.

The Post Office has offered home loans for years, but

is only now in the process of introducing “mortgage

specialists” to many of its branches. However,

contrary to how it might sound, these specialists will

not tell you which home loan is the most suitable – only information on the Post Office’s own product range.

When taking out a mortgage you may be offered an information-only service, fully independent advice, orsomething in between.

If you are in the process of taking out a mortgage here is what you should watch out for.

InformationOnly

Mortgage specialists at the Post Office and at many high street banks can guide you through the range of

products that they offer without giving you advice on which is the most suitable for you. This can be

confusing and the City watchdog says that many customers who have had an “information-only” discussion

believe they have received advice . That is why the Financial Services Authority (FSA) is looking at changingthese rules to make all mortgage sales “advised”. These proposals are still under consideration and will not

be implemented until next summer at the earliest.

Tied or Multi-Tied Advice

Some banks and building societies offer “ advice ”, even though they will only offer you access to their own

range of products that may not be the cheapest or the most suitable on the market. The recommendations

that they make are not independent or impartial. These advisers are known as “tied” or “restricted”. Be

aware that some mortgage brokers are not fully independent and select products from a limited panel of different lenders.

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Whole-of-Market

If you want impartial advice , choose a mortgage broker that offers products from across the whole market.

You can find a broker in your area by searching on Unbiased.co.uk, the independent advice website. Some

brokers charge a fee, while others are paid commission by the lender. Some do a mixture of both.

To be able to call themselves “independent”, brokers must offer the option for borrowers to pay a fee and

avoid commission altogether. However, brokers who are not labelled independent but are whole-of-market

are still obliged to recommend the best deal for you and not the one that pays the most commission.

Some lenders, such as HSBC, first direct and the Post Office, do not market their products through brokers, so

even if you are seeking advice, you should also check on price comparison websites.

Brokers that offer whole-of-market mortgage advice may still be tied to an individual insurer for the life cover

that is usually sold alongside the loan . If this is the case, check the quote against deals available on price

comparison sites.

Complaints

If you are not happy with the advice you receive from a broker, you should first complain to the business

directly and if you are not satisfied with the outcome you can take the matter to the Financial Ombudsman

Service. Check that your broker is authorised by searching the FSA’s register www.fsa.gov.uk/register/

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How You Can Save £100 Every Month

Not every person that reads The Wallet Doctor is an

assiduous saver. In fact, some of you tell us that you

find it impossible to put any money aside, however

much you earn. We invite you to reconsider this view.

If you think that it is not possible to save as little as

£100 a month, then it’s time to add up how

much money you are wasting on small purchases every

day. These indulgences mount up; some of them also

make you fat and unhealthy — so extra fitness could be

one side-effect of your new regime.

Eight pints of lager (the average price of a pint of beer is £3, according to the 2012 edition of the Good Pub

Guide) and a pack of 20 cigarettes (Marlborough Lights cost £6.21) a week equates to £130 a month. Twomedium cappuccinos to take away from Starbucks (price £2.50) per weekday adds up to £108 a month, as

does the cost of buying a £5 lunch every weekday from Pret A Manger or a similar chain. Giving up smoking is

another way to free up some cash to build your rainy-day fund. One reader who kicked the habit three years

ago calculates that he has saved £2,900 by giving up smoking. This estimate is based on the purchase of three

packets of cigarettes a week; he adds that this is a conservative estimate, since when he went out for a drink

with friends he would smoke more.

A bank or building society regular savings account is an easy way to save a lump sum fast. These offer higher

rates of interest than other savings accounts but there are some tight restrictions. Savers are required to

make a deposit of a certain amount each month; lump sum payments are not allowed.

There is usually a monthly minimum (from £1) and maximum amount (usually up to £250-£300). The high

rate of interest is only available for a certain period — usually 12 months — and once the term is up, the rate

of interest drops considerably. If you withdraw your money or fail to make a monthly payment you could

forfeit your rate of interest.

While some rates look extremely impressive (first direct offers a regular savings account with 8 per cent

interest rate to its customers), it is important to remember the interest is calculated monthly so you only get

the interest on the money in the account at the time — not on what you have built up over the course of the

year. For example, if you took out an account with a 10 per cent interest rate and saved £100 a month for a

year, you would only earn 10 per cent on the full £1,200 in the 12-month period.

The interest — usually paid annually — is taxed as well. To find out how much interest you could earn, use a

regular savings account calculator.

Here are some of the rates available:

West Bromwich Building Society (4.10 per cent)

Norwich & Peterborough BS (4 per cent)

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Saffron BS (4 per cent)

Teachers BS (4 per cent)

Kent Reliance (4 per cent)

Buckinghamshire BS (3.5 per cent)



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This is the important stage. Start a pension.

I Have No PensionFor many low earners, the right thing to do is nothing.

Zilch. Don’t save a penny. Why? Because if your

income is low – no more than about £12,000 a year –

it’s likely that whatever you scrimp and save will

effectively be whipped off your state benefits when

you retire.

The Financial Services Authority estimates that if you are 45 years old and save £20 a month when you come

to retire at 65 the pension you receive from these savings will be just £26 a month. The brutal truth about

pensions is that you have to save very large amounts every month, and for at least 20 years, to make it

worthwhile.

Pay off other debts – such as credit cards – and if you have spare cash left over, put it into a cash Isa as a

rainy-day fund. When you retire, apply for the means-tested pension credit which pays £130 for a single

person – the basic state pension is £95.25.

The pension credit is also a passport to other benefits including housing and council tax rebates.

If you anticipate earning more in future, then it may be worth starting a personal pension plan. The chief

benefit is that the money you pay into a pension is tax-free – although when you take the benefits at

retirement the income it generates is liable for tax.

So where do you start? There are hundreds of different pension plans, with a mystifying range of funds and

charges. Your first step should be the very useful FSA comparison tool where you can compare different

stakeholder and personal pensions from a range of providers. It also shows you the charges that you’ll pay

over the lifetime of the plan, which vary dramatically. For example, a 45-year-old saving £500 a month until

the age of 65 will pay £20,432 in charges and deductions on a plan sold by Scottish Life, but an extraordinary

£75,900 on a plan run by MGM Advantage. So-called stakeholder plans are generally cheaper than

conventional pension plans.

Whatever You Put Into a Plan, the Key Points Are:

The younger you start, the more you will end up with.

Your money will be locked up until at least 55 – so you must be comfortable with saying goodbye to it.

You might be better paying down a mortgage or loan or investing in an Isa.

If you want to find a financial adviser try unbiased.co.uk which will link you to advisers in your area,

according to search criteria you are interested in.

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I Have a Ragbag of Old Pensions from Previous Employers

Consolidate them – unless your former employer offered a final salary-related scheme. In those (rare) cases

it almost always makes sense to leave them alone, but make sure your contact details are up to date.

But if you’re in your 40s, it’s likely your old contributions are in group personal pension or money purchaseschemes that are festering away under high charges and poor performance.

You have a choice: either consolidate the money into the pension scheme run by your new employer

(although they may not accept transfers in anyway) or put them into a low-cost self invested personal

pension (SIPP) instead.

SIPPs are cheap, do-it-yourself pensions with great flexibility and a huge range of investment choices. They

work best for people willing to put the effort in – who understand something about investment and who are

willing to track and move their money around. When you have a SIPP, you can direct your pension into

individual shares, funds, bonds and even gold and commodities.

So How Do You Do It?

First, pull together your old pensions and get transfer values from your old schemes. Secondly, choose a SIPP

provider. There are four major providers that don’t charge a set-up fee – Hargreaves Lansdown, Fidelity

FundsNetwork, James Hay and Killik. Big pension providers such as Aegon, Standard Life and Aviva/Norwich

Union all offer SIPPs that allow you to invest in hundreds of different funds.

The big names make sense if you are a medium-bracket investor. If you are in the bulge bracket – with

upwards of £250,000 to transfer, specialist SIPP providers such as Dentons will tailor specialist portfolios.

Rachel Vahey, head of pensions development at Aegon, says: “Consolidating pension plans allows people to

manage their money better and plan more effectively for retirement. But it also allows them to increase

the buying power of their retirement fund – often larger funds can buy better value annuities, which will

pay out a higher level of retirement income.

Vahey warns people to look out for penalty charges that might be incurred – but says these are now unusual.

One worry is if your cash has been invested in a with-profits fund. If so, the pension company might apply a

market value adjuster when giving you a transfer value, depending upon stockmarket conditions.

I Am Paying Into a Pension Scheme With My EmployerFirst, make sure you are in it. You generally have to pay in a minimum percentage of your salary to qualify for

whatever extra the employer then pays in – and you would generally be ill-advised to forego this.

Secondly, top-up your company pension. Most new employees are put into what are called money purchase

schemes. You can invest more into plans via additional voluntary contributions (AVCs), in theory up to 100%



32

of your earnings. Many firms will boost your additional payments with matching cash for your scheme up to a

set limit.

Take control of your investments. In general, you should stick to equities when younger – despite the past

decade, they still outperform other assets over long periods – moving to safer havens such as bonds,

property or cash in the approach to retirement. Some schemes automatically move you into less risky assets

in your last decade at work.



33

Take Years Off Your Mortgage

For years we treated our homes like cash

machines, borrowing against their rising value and

then using the unlocked money to splash out on

new conservatories, cars, expensive holidays and

the like.

Now, as seems appropriate in this age of

austerity, we are “reloading the ATM”, and

repaying mortgage debt like never before. Official

figures revealed that homeowners paid off their

mortgages at a record rate in the final three

months of last year. All told, we reduced our mortgage debt by £7bn between October and December. Will

we have a repeat of last year?

While the data partly reflects homebuyers having to put down much bigger deposits, it also shows that large

numbers of people have realised that in the current climate it makes sense to pay off as much debt as

possible and are making mortgage overpayments.

So, what are the best ways of overpaying, who is doing it and why, how much can you save - and what are

the pitfalls?

Estimates vary as to how many people are overpaying; one survey put it at one in four homeowners, while

recent research from Barclays suggests it is 10%. Barclays reckons the average overpayment is £200 a month,

while Lloyds Banking Group puts it closer to £300.

The best thing about overpaying is that it can save you thousands of pounds in interest and shave years off

your mortgage. The Co-operative bank found the most common reason why people were making

overpayments was to repay their home loan more quickly, with the aim of becoming “mortgage-free” earlier

so they could perhaps go on more holidays, or save more for retirement.

Figures prepared by Halifax for Guardian Money looked at someone with a 25-year, £150,000 repayment

mortgage who is on its 3.5% standard variable rate (SVR), and what would happen if they overpaid by £50,

£100 or £250 a month. The numbers are compelling:

If they overpay by £50 a month, they would save £7,843 and lop off two years, four months from their

mortgage term. If they overpay by £100 a month, they would save £14,271 and take off four years and three months.

If they overpay by £250 a month, they would save £27,725 and trim eight years and six months.

Here’s another example. In September 2008 HSBC was offering a lifetime tracker at 0.79% above the Bank of

England base rate. So the rate homeowners paid was 5.79% then, and just 1.29% now. A £150,000 mortgage

over 25 years would cost £947 a month at a rate of 5.79%, and £585 a month at 1.29%. A borrower who

continued to make monthly payments at the 5.79% level would have paid off almost £9,000 more over the

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past two years than a borrower who elected to pocket or spend the fall in monthly payments, says David

Hollingworth at broker firm London & Country.

Rock-bottom savings rates are another reason why paying more than you need to can make financial sense.

“There is simply no incentive for people to tuck money away for a rainy day – it would lose value with

inflation so high,” says Carlos Von Sexron.

Some people say they are overpaying because they are aware interest rates may rise in the near future, and

they want to take advantage of the current low rates to pay down their biggest debt.

For others it is about increasing the amount of equity in their home, either so they have access to better

mortgage deals when they come to remortgage, or because they are trying to get out of negative equity.

Overpaying will reduce borrowers’ loan-to-value (LTV) ratio, which should make it easier to get the more

attractive deals reserved for those borrowing perhaps 60% or 70% of their property’s value, as opposed to

90%-plus.

Many mortgage deals will allow borrowers to overpay up to 10% of their outstanding home loan each yearwithout penalty. That will probably be more than enough for most buyers. Some people on flexible, lifetime

tracker and standard variable rate deals can overpay by as much as they like. Check what rules apply to your

home loan before doing anything. .

Just over a year ago, Lloyds Banking Group (which includes Lloyds TSB and the Halifax) launched a scheme

allowing tracker and discounted-rate mortgage customers to overpay their mortgages by up to 20% with no

penalty. This expired on 31 March, and the maximum has now gone down to 10% again.

Asked about take-up, a spokeswoman says there will be some people who were overpaying by more than

10%, but “they are in a minority”. She adds that when a customer’s special rate period finishes they go on to

the SVR, at which point they can make unlimited overpayments.

“Customers who do tend to overpay are generally on SVR or tracker products and have low LTV levels,” she

says.

“Our data also suggests that while many borrowers do take the opportunity to overpay when they can, many

also use spare funds to pay off debts or allocate it to short-term savings.”

The Co-operative bank and its Britannia arm allow those borrowers who can afford it to make additional

capital repayments on their mortgage of up to 50% without penalty. This scheme was launched in January

and looks set to run for several more months at least.

However, borrowers need to be aware that a capital repayment is different to an overpayment, in that it is a

permanent reduction in what they owe and can’t be returned. By contrast, overpaying allows Co-

op/Britannia customers to build up an “overpayment fund”, which sits alongside the mortgage balance and

can be withdrawn whenever they wish.

Nationwide’s fixed-rate mortgages and most of its trackers only allow overpayment of up to £500 a month

without penalty. If customers go over that by even a pound they will be hit with an early repayment charge

on the entire overpayment amount. If the charge was 5%, that is a £100 “fine” on a £2,000 overpayment.



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But not everyone with spare cash should be shovelling it into their mortgage. It is important to have

some money set aside for emergencies. Experts say people should aim to have easily accessible savings equal

to at least three months’ salary in case of a crisis, such as losing their job. And if they have expensive

borrowings such as costly credit/store card debt, any spare money should probably go towards paying that

off first.

Meanwhile, if you are one of those fortunate people on a super-low base rate tracker deal it may make more

sense to put some of the money you are saving every month into a savings account. When interest rates do

start to go up you will have a lump of cash that you can use to pay a bit off the mortgage.

Hollingworth says you need to do the maths to see if you could earn more interest after tax on your savings

than you are paying on the mortgage. However, some might argue that the satisfaction of reducing your

mortgage debt will beat a bit of extra savings interest any day of the week.

Some home loans offer an “offset” facility, where you use your savings cash to reduce the amount of interest.

If you have got one of these any overpayments you make should be into the linked savings or current

account, rather than the mortgage.







36

Insurance rates – Easy ways to pay much less

These days, you may feel as if you’re paying more

to insure your house and car than it cost to buy

them. Premiums are expected to jump by the end

of 2013, and some people could face double-digit

hikes. How to keep your costs down? First, when a

policy comes up for renewal, don’t just re-sign;

shop for a better deal. Second, pay bills annually if

you can; it’s often cheaper than paying monthly or

quarterly. There are also specific strategies for each

of your policies:

Sweet Savings for Home Owners

Companies blame the big rate increases on a cycle of severe storms and fires, rising home-repair costs, and,

in some states/counties, a growing number of claims for mold. What they don’t say: They’ve also

lost money on their investments, so they need to get more revenue from, guess who? The policy holders.

INCREASE YOUR DEDUCTIBLE

If you raise it from £250 to £500, you’ll cut your premiums by up to 15 percent. Go from £500 to £1,000

and you’ll save 25 percent.

HOLD DOWN CLAIMS

Several small claims might lead the company to hike your rates, if not refuse to renew your policy. Don’t

even call the company unless you intend to file for reimbursement; the very act of telephoning may

create a home-damage file, whether you make a claim or not.

SNOOP BEFORE YOU BUY

If you’re about to make an offer on a house, ask to see the report, which reflects every claim filed over

the past five years. This report shows whether the house has had any serious problems. If it has and the

repairs weren’t satisfactory, you may have trouble getting insurance at a reasonable rate.

Drive down your auto rates Rising medical, repair, and liability costs are behind the big hike in premiums. As with homeowners’

insurance, the surest way to cut costs is to raise the deductible. Hold back on making small claims. Also, tell

your insurer about any “rate-improving” changes in your life: Your teenage son has left home. You’ve

stopped driving to work. You’ve divorced your spouse–the one with all the speeding tickets.

What else helps with auto insurance?

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COMPARISON SHOP!

The most expensive policy in your area could cost as much as £1,000 more than the least expensive one.

Even if you’re getting a discount for being a longtime customer, you still might do better with a new

company. There are also price cuts for having your auto and homeowners’ coverage at the same firm, so

shop them as a package.

TAKE A DEFENSIVE DRIVING COURSE

That earned one of our readers a £200 discount.

PAY YOUR BILLS –ALL OF THEM –ON TIME

People with good credit reports get better rates.

DROP COLLISION INSURANCE IF YOUR CAR IS WORTH LESS THAN £2,000

You can check its value online.



38

Successfully managing your credit card debt

Credit card debt can carry with it a feeling of shame.

Many of us feel we should be further along in our

careers, and a blot of debt hanging over our heads is

a constant reminder that we’re not. But most of us

have at some point accumulated debt, and that’s

okay. Indeed, having debt does not necessarily mean

you’ll have a poor credit rating.

The highest interest rate you’ll ever pay is on

your credit cards, so in the pecking order of debt

repayment, this should be at the top. If you’ve

chosen a card because it has a low introductory or transfer rate, that’s great: It will lower your payments

significantly. Nevertheless, there are a couple of traps to watch out for:

Low Rates Don’t Last

Stay tuned for when the low rate ends, because at that point your interest rate will balloon. If you have a

consistent on-time payment history, don’t be afraid to ask your card issuer to give you a lower rate when the

introductory period is over. It won’t let you keep the original low rate, but it may be willing to work with you.

If it won’t, then move the balance over to another lower-interest card, if you have one.

Late Payment Penalties

If you make even one late payment on one of those low introductory (or transfer) rate cards, the issuer will

instantly cancel that fabulous low rate and unceremoniously bump you up to a much higher rate for the life

of the balance. Remember: Low transfer rates sometimes come with a fee for making the transfer, equivalent

to a percentage of the balance you’re transferring (this fee varies from card to card), so carefully compare

cards to find the lowest transfer fee. Doing this can save you hundreds of dollars.

Choose the Right Card Most of us get several new credit card offers a month, but that doesn’t mean they’re the best offers.

Carefully weight up the benefits of each credit card before you apply. We have a selection of cards we

recommend, including cards suitable for people with bad credit (in which we would recommend that the sole

intention of using them would be to improve their credit score).

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Skip cards that charge annual fees; credit cards are a very competitive market, and you’ll always find one with

the same interest rate but without the fee. Cards that offer airline miles or “cash back” only work if you’re

able to pay the balance in full every month; these cards rarely offer the lowest interest rates, and the “added

value” will probably be eaten up by the higher rate.

Keep a Healthy Credit Rating

If you’re making payments on multiple cards, closely monitor when each payment is due, as billing cycles vary

from card to card. Miss a due date, and you’ll not only pay a fortune in late fees, which average more than

£30 a month, but also the late payment will be reflected on your credit report, affecting your ability to get

lower interest rates on other credit cards, car loans, and mortgages.

Having debt isn’t necessarily bad for your overall credit score. That’s because it isn’t how much you owe but

how much outstanding debt you have relative to your total available credit. You may owe a lot, but that

amount may be well below your total credit limit, which is what you want. No specific number qualifies as a

“good” ratio, but lower is always better.

Lastly if you’re thinking of canceling an old credit card to improve your credit rating, don’t. Creditors look to

see not only how well you’ve been paying your bills but also how long you’ve had credit in your name.

Canceling an old card may make you look like you’re a credit risk when you’ve had a good, long history of

paying your bills on time.







40

Holding a Secret Weapon

In an era of high inflation and taxation, consumers

are increasingly looking for tax-efficient ways

to save money and make their financial products

work harder for them. Borrowers expect their

financial adviser to consider their mortgage in the

wider context of their overall finances, to ensure

that they have the most cost-effective combination

of financial products for their current circumstances

and future needs.

Offset mortgages are perhaps not commonly thought of as the secret weapon against taxation and inflation,

but to homeowners – and advisers – that is exactly what they can represent. Benefits such as tax efficiency,

the opportunity to pay less interest on borrowings and the potential for long-term financial planning are justsome of the attributes. Most mortgage borrowers have savings and for many, using this money to cancel out

some of their mortgage debt makes sense. And because offset mortgage lenders calculate interest daily,

every pound on deposit works hard to reduce the cost of borrowing.

Going back to basics, most offset mortgages work by setting the money otherwise held in savings accounts,

and sometimes a current account, against the amount outstanding on a mortgage. Instead of the homeowner

earning interest on their savings, the money effectively erodes the size of their overall mortgage, so they pay

less interest. Rather than earning money, they save it.

The current financial climate can be quite daunting for those trying to make their money stretch, or striving

to save for the future. This is a problem facing all consumers, but the pressure is particularly on high earnersto boost their savings to negate the effects of having to pay a higher rate of tax. Many such higher-rate

taxpayers see 40 per cent of any interest on savings accounts swallowed in tax, so an offset provides a

solution: because no interest is paid on accounts linked to an offset, there is no tax to pay.

Reduce

For consumers in all earning brackets, offsetting can genuinely be the perfect inflation busting solution and

offers the chance to save money. For example, offsetting £100,000 in savings against a standard variable rate

mortgage of £350,000, would save £266,793 in overall interest and reduce the mortgage term by almost nineyears.

In the past, rates on offset products were higher than on standard mortgages, making offsetting a viable

option only for people with sizeable savings. But as the mortgage market has become increasingly

competitive, rates have gone down and the difference between offsets and standard mortgage products is

now much less. Today, consumers will only pay a small premium for an offset product as opposed to a fixed-

rate mortgage and for those who take advantage of the offset, the benefits will often outweigh the costs.

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We know that control is an integral ingredient in what consumers want from their financial products: to feel

in control and to be able to take control. Offset mortgages – the ultimate flexible product – give the borrower

the ability to potentially shorten their mortgage term or reduce monthly payments, which can mean they

avoid the hassle of re-mortgaging to chase rates. In addition, money deposited through offsetting is not tied

in. Should the homeowners’ circumstances change, they can have easy, immediate access to funds, allowing

them peace of mind.

Offset mortgages are best suited to those looking for stability and a long-term package, but within these

criteria their appeal is becoming increasingly broad – from the self-employed to first-time buyers. Advisers

with self-employed clients can discuss the advantages of saving over the year to pay their tax bill in April,

while enjoying the benefits of offsetting this tax-free lump sum against their mortgage. They can also take

advantage of the other flexible offset features offered by select providers such as fee-free under- and

overpayments, which makes sense for anyone whose income varies each month.

But with so many offset products entering the market, IFAs and brokers can offer a key role in identifying the

most suitable provider. After all, clients will be entrusting a large portion of their finances to one lender, so

it’s important to get it right. For advisers, there is also value to be offered in explaining and evaluating theseproducts against traditional mortgages. Clients that gain most value from offsetting are those who take a

strategic, long-term approach. Professional advice can help these clients to turn their offset mortgage into a

financial and even life-management tool. It can also open up opportunities to review the client’s finances as a

whole.

Opportunity

Flexible and offset mortgages provide a genuine opportunity for an adviser to get a foot in the door, and

while they are excellent for long-term profitability, they are not suitable for all mortgagees. The options of overpaying, underpaying or even taking a payment holiday means that flexible mortgages should appeal to

those with similarly flexible lifestyles and incomes. However, the main beneficiaries of offsetting are those

financially savvy clients with savings who will be drawn to a tailored product that allows them to pay off a

mortgage early and approach retirement in control of their finances, with security and extra cash in their

pockets.

By advising high net worth clients of the savings that can be made through offsetting, advisers can add value,

maintain dialogue and potentially sell more products in the future. With a high level of financial awareness, a

desire to shop around for financial products and a proven saving track record, individuals who choose to

offset are the type of clients with whom advisers can develop an ongoing relationship.

In a time where long-lived client relationships are key, research has found that nearly two-thirds of IFAs

believe that providing advice on the best use of flexible features could improve client relationships. Offsetting

is a core flexible feature that needs to be front of mind for consumers and advisers looking for ways to

make money go further and work harder.







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Key Points

Offset mortgages can be thought of as the secret weapon against taxation and inflation

Offset mortgages give the borrower the ability to potentially shorten their mortgage term or reduce

monthly payments

By advising high net worth clients of the savings that can be made through offsetting, advisers can add

value, maintain dialogue and potentially sell more products in the future

Offset mortgages can make money go further and work harder for increasing numbers of borrowers



43

How to get a low-interest credit card

No one wants a credit card that carries an interest

rate of 20% if they could get one at 7%, and without

any annual fees, but as we know the barrier-to-entry

for such credit cards is the applicant’s credit score.

Your credit score is a reflection of your “credit-

worthiness”, but don’t forget that there are other

factors that also determine whether you qualify.

It may be said that the vast majority of people turned

down for credit cards have been rejected due to

having a bad credit history (missed payments –

arrears, defaults, CCJs), but people that have too

many cards, and people who have an imbalancedcredit to debt ratio also get declined for low-rate

cards.

Let’s have a look at all the factors that determine whether you qualify and what you can do:

Number of Credit Cards.

If you have opened more than one or two accounts in the last 6 months then it’s likely that a lender will not

look at this favorably. In addition, no more than two revolving accounts opened in the past 12 months should

have a balance outstanding. Finally, you should not have more than four revolving accounts that currently

have balances, regardless of how old the accounts are.

Balance-to-High-Credit Ratio.

This calculation is the ratio of your current balance to your available credit limits. For example, if you have a

$1,000 credit limit on a card and your balance is $800, your balance-to-high-credit ratio is 80 percent (800

divided by 1,000). This ratio should not exceed 80 percent for two cards and 60 to 65 percent for three or

more cards.

Debt-to-Income Ratio.

Creditors want to know what percentage of your monthly income is going toward your bills. Their fear is that

if you use a high proportion of your income to pay bills, you may not have enough money available if a

financial emergency arises or if your income should drop. To calculate your debt-to-income ratio, divide the

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44

monthly sum of your payments on credit bills (and the mortgage or rent you pay) by your monthly before-tax

income. Most lenders require a debt-to-income ratio (including the mortgage or rent) of less than 35 to 45

percent.

Income Requirements.

Typically, banks require a minimum income of $12,000 for a standard card and $30,000 to $40,000

(household) for a gold card. Some banks require a minimum income of $20,000 to $25,000 for a standard

card, and some banks have no minimum income requirements.

Payment Delinquencies.

In general, if you have any accounts that were ever behind more than 60 days in the past four years, this will

count heavily against you. Obviously you shouldn’t be behind, even by 30 days, on any accounts at the time

you apply.

Credit Inquiries.

Anytime you fill out a loan application, you are allowing a potential credit grantor access to your credit

history, and an inquiry will appear on your credit report. Also, your current credit-card issuers may review

your credit report from time to time, creating additional inquiries on your file.

When you apply for a credit card, the lender checks your credit report, and too many inquiries in the six-

month period before your application can mean automatic rejection. The threshold really varies from lender

to lender. One bank allowed no inquiries in the past six months, while another allowed nine in the sameperiod of time. In general, inquiries for retail cards seem to be viewed more liberally than those for bank

cards.

Promotional inquiries are those created when a bank asks the credit bureau to review your credit report

before mailing a pre-approved application. They are an exception to the inquiry rules. Since they do not

appear on the credit reports sent to lenders, they should not count against you.

CollectionRecords.

If your credit file shows a collection account (also referred to as a profit-and-loss account), most lenders will

reject your application out of hand. A collection account is one that you failed to pay, so the lender turned it

over to a collection agency. One possible exception to this standard is a medical bill that was ultimately

turned over to a collection agency. In such a case, the amount in question has to have been small and have

been fully paid before the applicant can be considered favorably.







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Public Record Information.

This is information about bankruptcy, judgments, repossessions, federal tax liens, wage garnishment or

foreclosure that appears on credit reports. In most cases this type of information causes immediate rejection.

If public record information on your credit record is more than four years old, your application may still be

considered by some lenders. However, your other qualifications must be very strong to overcome thatnegative information.

Employment and Residency Requirements.

Stability counts. Most lenders require you to have been at your present place of employment for at least one

to two years. They also expect you to have lived in the same city or area for two years, although this does not

appear to be a hard-and-fast rule.

Credit card issuers offer low-interest cards to people who have few credit cards, a low debt rate, enough

income to pay the average debts accumulated and a good credit history.

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Thank you for reading.

You can get more advice on our website: http://theWalletDoctor.com

Updated several times a week!





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