Financial Makeover - New Year, New You

Everyone knows that Christmas can be tough on your finances. Aside from all the presents and socialising, many people’s household budgets go out the window over the festive period, leaving them wondering what they spent all that money on. But all is not lost – the New Year is a great time to makeover your finances and plan for the year ahead so that you can manage your money, sort out your debts and meet your financial goals in 2008.

Start budgeting:

Decide now that 2008 will be the year your finances get in shape. During the next few weeks we will be providing numerous ideas and tips to help you get your finances in line.

Our philosophy is that personal financial management should take its lead from the professionals. In business, financial management is not simply about managing day to day cash flow but rather monthly, quarterly and annual budgeting; setting aside sufficient cash to ensure a year of no surprises where all income and expenditure has been foreseen with a contingency set aside for any unexpected bills.

People effectively "cash account" with the money they earn. They concentrate simply on the short term, pay the rent/mortgage, pay the car repayments, the electricity and other utilities and then anything remaining is simply discretionary income. They feel they have the safety net of their overdraft or their credit card should any big bills come in. This is a naive and potentially risky way of dealing with your finances.

Our approach, which takes its lead from big business, is to plan for the next twelve months setting aside sufficient funds each month to cover those annual bills as well as budgeting effectively on a day-to-day basis.

First three steps

Identify the following:

1. How much you are earning
2. How much you are spending
3. What you are spending your money on

It is vital that you are honest with yourself even if you discover you spend 50% of your income on pick and mix! Avoid the mistake of overestimating your income and underestimating your expenditure.

Once you identify where your money is going you can see where you might need to make adjustments so you can achieve your goal of a year with healthy personal finances.

So your homework for the next few days is to sit down, take a page of A4 paper draw a line down the middle. On one side list any and all sources of income and on the other all expenditure. The idea is to include as much detail as possible. Include day to day spending, mortgage/rent bills as well as annual items such as car insurance, gym membership and any other expenditure you can foresee for the next twelve months. For items that are difficult to value such as weekly shopping bills etc., estimate them as accurately as you can.

This cathartic process is a major step on the road to financial recovery and good health.

December 2007

When you get your December salary, transfer part of it to a seperate account in anticipation for the long month of January. Many people get an early salary in December and then nothing until the end of January, with the joy of overstretched credit card bills to pay off along the way.

Festive Finance Tips

Now I'm a sucker for seasonal traditions and annoying Christmas songs but when the time comes to take down the tree and recycle the Christmas cards, my New Year's hangover is always heightened by the sheer dread of looking at the damage done to my bank account during the giddy days of December.

To help people start the year on a more positive note, here are a few festive finance tips to keep the seasonal spending under control.

1. Set a budget for different spending areas before you start your Christmas shopping. Allocate a limit to the amount you spend on each person on your list and be strict with yourself, think about how many of last year's Christmas presents become this year's recycling.
   
2. Add up how much you have allocated to each person and to the food shopping and make sure it's a manageable amount. Be honest with yourself, denial leads to more debt!
   
3. When it comes to the dreaded supermarket shop, try and buy as much as you can in the weeks leading up to Christmas (providing you have a good hiding place from the hungry hoards). By breaking the bill up over several weeks, there will be less of a shock when you do the 'big shop'.
   
4. When you get your December salary, transfer part of it to a seperate account in anticipation for the long month of January. Many people get an early salary in December and then nothing until the end of January, with the joy of overstretched credit card bills to pay off along the way.
   
5. Take care when buying gifts from outside of Europe. While the prices quoted on the internet may seem remarkably cheap and the weakness of the US Dollar very favourable, there is the unmentioned matter of customs and excise duty and import VAT to be considered. For specific details on duty charges, check out the rules on HMR&Cs website.
   
6. When buying gifts, make sure you keep the receipts in case there is a problem with the goods and they need to be returned. Check that goods are in working order as soon as possible as there may be a restricted return period.

On that note, I need to do some wrapping, so I'd like to take this opportunity to wish all our bloggers a very HAPPY CHRISTMAS and a prosperous New Year.........

November 2007

Write a Will

Here are 5 reasons why you should have a will written.

1) If you die without a will (known as dying “intestate”), there are certain rules which dictate how your money, property or possessions should be disposed of. This may not be the way that you would wish your money and possessions to be distributed.

2) Unmarried couples or partners who have not entered into a civil partnership cannot inherit from each other unless there is a will, so if one of the couple was to die, the other could be left in serious financial difficulties.

3) If you have children, you will need to make a will so that arrangements for the children can be made if either one or both parents die.

4) It could be possible to reduce the amount of inheritance you have to pay to the taxman by using a will.

5) If your circumstances have changed, it is important that you make a will to ensure that your money and possessions are distributed according to your wishes. If you are married or enter into a civil partnership, this will make any previous will you have made invalid.

Bank of Ireland Update

Just a quick word about our tip last week.

For those who took our advice congratulations, 22% return in just over two weeks, up to EUR 10.95 today. I still believe it's good value under EUR 10.50 just be careful of overpaying on commissions. This is the first time I have bought shares and paid EUR 72 commission on the trade which is very high. For BOI customers, the easiest method would be through your own branch.

I have looked into purchasing shares online through Irish stockbrokers and the best value appears to be sharewatch.

Another very good article about transaction costs of trading is in the Irish Independent.

Sharewatch also provides a price comparison with other Irish stockbrokers including Davys, Goodbodys and Dolmen.

Goodbody online provide some very useful daily financial advice free in their morning meeting wrapup section.

My Investment Tip

After a little dose of doom and gloom, we decided we'd better brighten up the dark days of November with a little investment tip. So far my favourite investment has been property in Abu Dhabi, see post 3rd October. This is working out really well for us; as the dollar continues to fall our investment becomes cheaper and cheaper. Hopefully, by the time it comes to selling in 2009/10, a strengthening dollar will further add to our return.

Our most recent punt is on the stock markets and more specifically the Irish index of shares. We have recently bought 400 shares in The Bank of Ireland @ €9.01. We feel this represents great value. Bank of Ireland (BOI) shares have fallen dramatically in value since highs of €18.83. A 50% decline in share value hardly represents a strongly performing company, but bear with me.

The steady decline in share price has been largely caused by the subprime market volatility and its knock on funding implications for banks. This funding issue is not as significant for Irish banks as they have largely avoided the subprime issue, and also do not require the same level of funding from international capital markets as many of its US and UK competitors. BOI is essentially a profitable bank with profits of over EUR 1 billion forecast for six months to September 2007. Profits for the second half of the year have been revised downward but are still considerable. Concerns over the Irish housing market slowdown have added to the fall in share price.

We purchased a modest holding of 400 shares at EUR 9 yesterday. Coincidentally UBS Fund Services acquired a 3% shareholding in the Bank and many stock brokers have moved from a neutral position to a buy position on the share.

Our main motivation is the tantalizing prospect of making some money off the back of the banks whose increased charges and fees continue to irritate us on a daily basis!

We plan to hold the shares until about March, April 2008 after the BOI year end. I must stress that this is pure speculation and is a high risk strategy, not advisable unless you can afford to lose your investment. We would strongly advise against borrowing to fund such a short term investment. Most advisers would argue that it is not possible to make considerable gains over such a short period of time, we will keep you posted.

Will You or Won't You?

Where there's a will there's a way

Moving on from James' obsession with murder to the more cheery topic of wills...... As seen in November's Tip of The Month, there are many valid reasons why you should set up a will. While this may seem a little depressing and instill the fear of excessive solicitor fees, I imagine these things are far easier to communicate to a solicitor in our lifetime than to a psychic after death.

I can understand the temptation to ignore the matter but it seems crazy not to take the time to write down how you would like your worldly goods, that you've worked so hard to obtain, to be distributed.

Having said that, while there are formal requirements when it comes to writing a will, if your circumstances are straightforward, there is no actual need to use a solicitor. However, as the rules are quite specific and it is so crucial that the document has the effect you intend, it might be a good idea.

Choosing a Solicitor

We would recommend that you contact a few local solicitors to compare prices, bearing in mind that the cost will reflect the complexity of your circumstances. Realistically tho, you'll be looking at around £50 to £300 (EUR75 to EUR450).

It might also be worth checking your insurance policies/trade union rights as you may be entitled to free legal advice in relation to writing your will.

If you are determined to avoid the use of a professional, there are some great online software based options. Two great options are online legal website 'Lawpack' that offers both online will writing and software downloads from £14.49, and 'Desktop Lawyer' who provide a variety of wills and other documents.

Prior to meeting with your solicitor, consider the following points and list the key facts relating to your circumstances to reduce the time required on your will & therefore the amount they can charge!

Content

Things you will need to consider when drawing up your will include the following:

1. How much money and what property and possessions do you own? For example, property, savings, occupational and personal pensions, insurance policies, bank and building society accounts, shares.


2. Who you want to benefit from your will? You should make a list of all the people to whom you wish to leave money or possessions. These people are known as beneficiaries. You also needs to consider whether you wish to leave any money to charity.


3. Who should look after any children under 18?


4. Who is going to sort out the estate and carry out your wishes as set out in the will? These people are known as the executors.

NB. An executor takes on a huge amount of work and responsibility in the form of dealing with all the paperwork and paying all outstanding debts, taxes, funeral and admin costs out of the assets you leave behind. They will also have to execute any financial transfers/gifts that you stipulate in your will. Therefore, it might be courteous to ask the person you have in mind or else appoint a professional!

Requirements for a valid will

To ensure a will is a valid legal document, it must be:-

• In writing
• Written by some who is 18 or over
• Made voluntarily and without pressure from any other person
• Made by a person who is of sound mind. This means the person must be fully aware of the nature of the document being written or signed and aware of the property and the identity of the people who may inherit
• Signed by the person making the will in the presence of two witnesses
• Signed by the two witnesses, in the presence of the person making the will, after it has been signed. A witness or the married partner of a witness cannot benefit from a will. If a witness is a beneficiary (or the married partner or civil partner of a beneficiary), the will is still valid but the beneficiary will not be able to inherit under the will.

NB. Although it will be legally valid even if it is not dated, it is advisable to ensure that the will also includes the date on which it is signed.

Storing your will

Once a will has been made, it should be kept in a safe place and other documents should not be attached to it.

There are a number of places where you can keep a will:-

• At home
• With a solicitor
• At a bank
• At the Principal Registry of the Family Division of the High Court, a District Registry or Probate Sub-Registry for safe keeping.

If you wish to deposit a will in this way you should visit the District Registry or Probate Sub-Registry or write to The Probate Department.

Changing a will

If your circumstances change after writing your will (ie marriage/divorce/children), you will need to amend the original document. To do this, you must either make a 'codicil' (supplementary document detailing alterations for simple changes) to the original will or write a new will. If a new will is created it will supercede all previous versions.

We highly recommend that you take action and resolve your will asap. A bit of effort now will save an enormous amount of conflict and stress down the line.

Just a quick update, there is an great new website available for our Irish readers www.wills.ie, very easy to use

October 2007

Set up a monthly direct debit from your current account to cover the balance on your credit card. This will allow you to monitor your spending and eliminate any nasty surprises. An awareness of your financial position is vital no matter how unappealing that may be!

Murder on the Dance Floor

Hello all. Sorry about the lack of posts recently, Beth & I have been really busy at work. Both of us work in the financial services industry and have been so busy as financial markets continue to experience severe turbulence.

A recent article in the Financial Times caught my eye. The article was about Charles Prince who was the former CEO of Citigroup, the world's largest financial services company with assets of more than USD 2.3 trillion and 332,000 staff around the world!!

Prince was quoted in July shortly before the collapse of the subprime market as saying;

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing". Unfortunately for Prince and world financial markets, the DJ had played too many tunes and the club was well and truly closed."

However, this got me thinking about a nightclub as an analogy of our attitude to personal investment. Historically, nightclubs are very fickle businesses opening and closing with regularity, often under new management. The most important factors for success are not only providing what the clubber wants, but also maintaining that element of chic or cutting edge cool. Initially the "in" crowd will come to a new club, glamorising it. As word goes around, the club develops a reputation as THE place to be. It becomes more and more popular, with everyone wanting to get in. So much so that if "your name's not down you're not coming in". Management become increasingly aware of their 'cash cow' and prices go up, marketing increases, top DJs are brought in and it's champagne and VIP rooms all around.

This is the point where the original hip crowd realise that what made the club cool in the first place has all but disappeared. They look at the dance floor with ladies dancing around their handbags and guys checking them out in their Ralph Lauren suits and head for the door. Initially nobody notices. The DJ plays on. The barman passes the waitress another magnum of Cristal Champagne. Over the weekends however, the paparazzi stop showing up, the queues begin to thin and a dated feel begins to enter the club every Saturday night. After a few months, all but the last stragglers have moved on leaving them to pick up the tab.

Personal investment schemes can follow a similar pattern. From Spanish property, to buying to let, to investing in subprime mortgage products. We as private investors are usually the last to hear about the best new deal and are often the ones left footing the bill. This is not to discourage anyone from investing, but always be aware that even the top professionals in the world get it wrong .......... regularly. They are lucky enough not to be investing their own money, you are not.

And what of our friend Mr Prince? Well, investors called for his head following the subprime collapse and he was forced to resign. Beware, its murder on the dance floor.

UK VAT - As easy as ABC

We were recently asked by a friend about the basic concepts of VAT and how it affected her as someone who is both an employee and self-employed. As explained below, this is a tax applied to business transactions rather than employment income so it is important to distinguish the nature of your income when applying the VAT principles.

What is VAT?

Value Added Tax (VAT) is a tax charged on most business transactions made in the UK or the Isle of Man.

It is also charged on goods, and some services, imported from places outside the UK (special rules apply for EU and non-EU imports)

UK and Isle of Man

All goods and services that qualify for VAT are called ‘taxable supplies’.

Once registered for VAT, you must charge VAT on all your taxable supplies, no matter how diverse.

The value of these supplies is called your ‘taxable turnover’.

Examples of taxable supplies include:

• Selling new and used goods
• Renting and hiring out goods
• Providing a service, ie. hairdressing or decorating

Certain services are ‘exempt’ from VAT. These include loans of money, insurance, certain types of education and training and some property transactions (selling, leasing and letting land and buildings, but not garages, parking spaces, hotel or holiday accommodation). Supplies that are exempt from VAT do not form part of your taxable turnover.

Rates of VAT in the UK

• 17.5 per cent (standard-rate)
• 5 per cent (reduced rate)
• 0 per cent (zero-rate).

All goods and services which qualify for VAT at the standard, reduced or zero-rate are called ‘taxable supplies’, whether you are registered for VAT or not.

Registration Requirements

You must register for VAT if:

• At the end of any month the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - £64,000 or

• At any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold - £64,000 - in the next thirty days alone.

(Value of taxable supplies = Taxable turnover = Total income from the sale of taxable supplies and NOT just the profit made.)

To register for VAT you must complete form VAT1 which you must send to HMRC within 30 days of any of the above. You will then receive a certificate of registration (form VAT4) detailing the effective date of registration along with your registration number.

Registration can be done online on the HMR&C government website.

Voluntary Registration

There are advantages and disadvantages to registering voluntarily. Before you apply weigh up carefully whether it will benefit you.

Benefits include :

• Increased credibility for your business and,
• If your business makes standard or zero-rated supplies, you’ll be able to claim back input VAT that you have paid.

However, once registered for VAT, you'll have to:

• Account for output tax on all your taxable supplies
• Keep proper VAT records and accounts
• Send in VAT regular returns
• Charge VAT on all supplies that could reduced your competitive edge in terms of prices.

Rule Breakers

If you don’t register for VAT at the correct time you will still be liable to pay VAT on taxable supplies and you are likely to pay penalties for late payment.

VAT Return

If you are registered for VAT, you are basically acting as a tax collecter on behalf of the revenue office. The return you file (normally every 3 months) simply compares the amount of VAT you have received (Output VAT) to the amount of VAT you have paid (Input VAT) and the difference is settled with the tax man. The return must be filed no later than the last day of the month following the period being reported.

Input VAT is the VAT that you pay out to your suppliers for goods and services that you purchase for your business, ie. the VAT added to the invoices you receive IN the post.

Output VAT is the term used to describe the VAT you charge on your sales of goods or services, ie. what you add on the invoices you send OUT.

VAT returns can also be done electronically

Exempt/Zero-Rated Supplies

If the only services you supply are exempt supplies, you can’t normally be registered for VAT.

If you are registered for VAT and have some exempt supplies you may not be able to get all your input VAT back.

If you only supply goods that are zero-rated, you may not have to register for VAT even if your taxable turnover goes above the registration threshold, but you do have to tell HM Revenue & Customs (HMRC) first and apply to be ‘exempt from registration’.

Registration might be worth considering if you supply zero-rated supplies and have paid a lot of VAT in relation to business costs, as you will be able to reclaim the VAT you have paid.

Deregistration

If you no longer qualify for compulsory registration and want to deregister, it is compulsory to inform HMR&C.

This is just a basic overview. For more information call the National Advice Service 0845 010 9000 or drop us a line.

Freehold V Leasehold

There are two main legal categories of land and property ownership.

Freehold

Purchasing a freehold property means that you are the full owner for an unlimited duration. As the freeholder you will have full responsibility for the maintenance and repairs of the property. Subject to law and planning restrictions, you can do what you like to and on your premises.

Leasehold

Purchasing a leasehold property means that you own the property for as long as is specified in the terms of the lease. You are granted the right to live there by the freeholder. At the end of the lease the property becomes the possession of the freeholder once again. In essence you are simply paying for the right to occupy a portion of a building for a given length of time.

Many leases are originally granted for up to 999 years, but existing leases on properties are usually shorter. The majority of leasehold properties are flats or commercial property, although some houses are leasehold.

The lease stipulates who is responsible for maintaining and repairing different parts of the property and any conditions you must meet as a resident. Check these if you are considering buying a leasehold. You must also pay a ground rent to the the freeholder, usually a small amount paid each year. Your solicitor should check that the seller is up to date with ground rent payments before you sign the contract.

You should not buy a property with a lease of less than 60 years, and mortgage lenders are very unlikely to lend for a lease as short as this. Lenders normally want at least 20 years left on the lease after the end of the mortgage term. As a leaseholder you have the right to extend the lease for 90 years or even to buy the freehold if certain criteria are met, though the application process is expensive and takes a long time. Contact the Leasehold Enfranchisement Advisory Service for more information.

Bank accounts - What to look for

With the DIY phenomenon that has swept the nation, stashing cash under the floorboards just isn't an option in this day and age. So thankfully we're incredibly spoilt when it comes to choosing a suitable bank account. Be it simply for safekeeping your hard earned cash or for providing flexible international transfers for your new business, you need to decide the type of account you're looking for. The standard accounts are:

Current account - Standard account for everyday use.

Savings account - Less flexible, higher interest account for money we can afford to put aside.

Student account - Only available to registered students and likely to offer reduced interest charges on overdrafts and other incentives.

Business account - Suitable for regular transactions regardless of the size of your business.

While the specifics will vary depending on the requirement of your account, the standard services would include the following options:

• Interest on balance
• Overdraft facility
• Internet/telephone banking
• Cash card/Debit card/Cheque card/Credit card
• Direct debits & standing orders
• Automatic transfers national & international

So how on earth do we decide?

Some of the key criteria that you should consider are detailed below. You need to check out the terms of available bank accounts and determine which one is best suited to your needs. A great site for comparing accounts is moneysupermarket.com . Check it out, bearing in mind the following:

(i) Bank Interest

Ever changing interest rates can have a huge impact on your bank balance. If you're looking to build up some savings, you want an account that offers the highest rate of interest possible. One of the pay-offs of a high interest savings account however could be flexibility in terms of withdrawals & payments, so consider how you intend to use the account day to day.

If there's a chance you'll need to rely on an overdraft facility, you must check the interest rate you'll be charged as it will always be higher than the rate the bank would ever pay you on your savings.

The rates a bank account will quote are AER for positive bank balances and APR for balances in the red (see definitions below).

(ii) Overdraft facility

An overdraft is a very handy facility and is a cheap option in terms of short-term, low level borrowings. However, it can also become a slippery slope, and it's often very difficult to get back into a positive balance once you become accustomed to spending the bank's money! Take control of the limit set on your account. Set it to a realistic level that you can control, try & treat it as an emergency money pot.

Be very careful not to exceed your limit. Bank charges are particularly harsh on borrowers pushing their luck, in the region of £30 (EUR50) a transaction.

(iii) Bank charges

Charges are often a flat rate amount. You could be subject to charges on withdrawals, electronic payments and breaches of overdraft facilities. Some banks will simply charge a monthly amount as a service fee, so check the details and consider which account will result in minimal fees for you.

(iv) Cash card/Debit card/Cheque card/Credit card

A cash card allows you to draw money from Automated Teller Machines (ATMs or cash machines). Many banks set a daily limit as to how much you can take out, even if your account contains funds.

A debit card allows you to pay for goods at the point of purchase, providing there's money in your current account. Some shops may also provide 'cashback' when making your purchase.

A cheque guarantee card is used to back up any cheque you write - usually up to the value of £50-£100 (EUR 70-EUR 130).

A credit card allows you to pay for things on credit ie. buy now, pay later. You will receive a seperate statement for this facility and need to arrange repayment from your current account regularly as you will pay for the pleasure, as you would if you took out a loan.

(v) Accessibility

Check out how many cash points there are in your area and the availability of customer support services. There's nothing worse than feeling abandoned by your service provider.

(vi) Electronic banking

Internet banking is the way to go if you actively use your account. You can keep a close eye on your balance and the transactions being processed, and arrange for electronic payments including direct debits (regular payments) and standing orders (fixed regular payments).

Most banking is virtual these days and you rarely actually need to carry cash when you can do it all on the Internet or with bank cards.

Warning

Watch out for promotional offers, especially on business bank accounts. They are designed to attract custom and you need to check what the true terms will be after the promotions end.

Definitions

AER - Annual Equivalent Rate

The interest received on a savings account is referred to as the Annual Equivalent Rate (AER). Any interest rate quoted as an AER will only be accurate if you do not withdraw money from your account during the year in question. The reason for this is that the AER illustrates what the interest would be if the interest was paid and compounded (added to the interest from previous payouts). Therefore, any withdrawals that you make from the account can affect the rate you will receive at the end of the year.

Don't forget that if you're a UK taxpayer you will also need to deduct 20% from any interest calculation as the interest you earn is a taxable source of income. Most banks and building societies will quote the interest a gross amount (before tax is taken), and will pay the interest into your account as a net amount (after tax is taken).

APR - Annual Percentage Rate

Any borrowings that you may have will charge you interest, instead of paying you interest. The interest that you are expected to pay is often referred to as the Annual Percentage Rate (APR). The APR is the rate of interest that a lender is required by law to quote, and it represents the true cost of the borrowing. If you are looking to take out any form of borrowing, then you should try and get the lowest APR you can, as this will be the total amount of interest that you are expected to repay over the course of your agreement.

Disposable Income - What's left to our discretion?

The definition of disposable income according to Wikipedia is the total amount of income an individual makes after direct taxes.

Gross income - taxes = Disposable income

Discretionary income therefore is the amount after taxes, and after the cost of the fixed expenses of life (rent/mortgage, food, car payments, insurance, etc.), otherwise known as necessities.

Gross income - taxes - necessities = Discretionary income

In other words, it's income that can be saved or spent on goods and services that we want, as opposed to things that we need.

When applying for a loan or a mortgage, banks often take into consideration the applicant's disposable income in order to assess the loan repayment capacity of the applicant.

What's left to our discretion?

Recent news reports have highlighted that disposable income in the UK is at its lowest level for a decade. It seems that no matter how hard we work, the costs of living continue to rise; which makes one think that too much of our income ends up in the waste disposal and not enough is left to our discretion.

A price comparison website uSwitch claims that in 1997, when Labour came to power, people were left with 34.5% of their gross income once they had paid taxes, national insurance, mortgage or rent. Now they are left with only 32.6%.

The biggest salary swallowers highlighted in the table below relate to 4 key areas that have increased the most over the last decade.

(i) TAXES: Direct taxes linked to our salaries have shot up 81%, which some may argue results from a fair income graded tax system. Far less satisfactory however is the increase in indirect taxes (those that are not linked to our income) and in particular council tax rates which have increased by a whopping 92%.

(ii) HOUSING: The cost of a mortgage has more than tripled in 10 years which affects both home owners and tenants. This problem has been enhanced recently as many home owners are being forced to switch from a fixed rate mortgage to a variable rate, which with the increase in interest rates in recent years could come as quite a shock.

(iii) PHONE & INTERNET: Communication and information have become a huge part of daily life. As a result, related bills have risen 77%.

(iv) PETROL: A necessity for many people, the cost of petrol has risen by 55%.

Is it all doom and gloom?

There's no denying life has become more expensive, but we need to keep it in proportion.

According to the Office for National Statistics data, the RPI index increased by around 17.5 per cent over the ten year period in question.

In actual terms, a comparison between 1997 and 2007 shows that disposable income is as follows:

1997: 35% x £34,796 = £12,002

2007: 33% x £53,895 = £17,530

This means an increase of 46%, which when compared to inflation shows a fairly healthy step up in actual disposable income.

Having said that, the increase in costs will affect a lot of people at a time when there's been a noted increase in the number of households living below 60% of the average household income. Ultimately, each of us needs to assess our personal situation and take steps to manage our outgoings in relation to our income.

Keep an eye on our blog, we're planning to issue advice on personal finances and saving plans in the next few weeks, aimed to help with bill management.

National Insurance Contributions – Bridging the Gaps

The Rules

Compulsory National Insurance Contributions are only payable on earned income.

However, if you have gaps in your contributions, it could reduce the amount of state pension you receive when you retire, therefore you might consider making voluntary contributions.

The rules state that:

• If you retire having paid contributions for less than 25% of the qualifying years (1) for a basic pension, you will not receive any basic state pension, nor will you be able to get a refund for the contributions made.

• If you have paid contributions for more than 25% of the qualifying years but do not qualify for the basic state pension, you will get a basic state pension of between a minimum of GBP 21.82 and a maximum of GBP 87.30 per week, pro-rated on the number of years you contributed.
  
  
• If you have paid contributions for 100% of the qualifying years you will be entitled to the full basic state pension (currently GBP 87.30 per week)

It is possible to get the HMR&C (HM Revenue & Customs) to assess your pension forecast based on contributions made. To do this you will need to complete form BR19 at the Pension Service website, or you can call them directly on 0845 3000 168 quoting your National Insurance number.

Maternity Leave

If you are claiming child benefit in your name for a child under the age of 16 and you are registered with the HMR&C you will automatically qualify for Home Responsibilities Protection (HRP). This is a scheme set up to protect your basic state pension while you care for your child. Basically, it reduces the number of qualifying years you are required to make NIC contributions.
It is valid if you were claiming benefits from the beginning of the tax year ie. Since 1st April and until your youngest child is 16, provided you do not exceed the limits set out for self-employed earnings (see below). However, you can only reduce the number of qualifying years by a maximum of 10 years.

Non Earning/Earnings under the required minimum

Class 3 NICs

For any period of time you are not earning enough for required contributions, the voluntary contributions you would pay are Class 3 National Insurance Contributions, payable at a flat weekly rate of GBP 7.80.

Employed

If your earnings in a tax year exceed GBP 4,524, it will be considered as a qualifying year and you and your employer will have the appropriate NIC deducted at source from your salary. (For more details on employer/employee contributions refer to the pension service website).
If your earnings are below this threshold and you do not make voluntary contributions, you will have gaps in your contribution record, which can reduce the amount of state pension you receive when you retire.

Self-Employed

Alternatively, your other option is to register with the HMR&C as being self-employed. If you do this you will be subject to Class 2 and possible Class 4 NICs.

Class 2 NIC s

In the current tax year (ie from April 1, 2007) Class 2 NIC is payable to the HMR&C at a weekly flat rate of GBP 2.20. This would not change substantially year on year.
You can get an exemption if you earn less than GBP 4,635 in the tax year, however by not paying contributions you may lose entitlement to full state benefits. Therefore, it is better to pay Class 2 otherwise you would have to pay voluntary Class 3 to ensure entitlement to all benefits, which are currently more expensive.

Class 4 NICs

Class 4 NICs are paid on profits above a certain level. They do not entitle you to state benefits but they are a legal requirement and are calculated as part of a self-employed person's annual tax return.

Class 4 NICs are payable at 8% on annual profits between GBP 5,225 and GBP 34,840 plus 1% on any profits above that.

For example, if you made a profit of GBP 10,000 in the tax year, you would pay:
8% * (10,000 – 5,225) = GBP 382.

NB: Bear in mind that if you opt to become self-employed, you should notify HMR&C and arrange to pay Class 2 National Insurance contributions as soon as you start self-employment. If you don’t, it could mean that you will be liable to a penalty of £100 and will have to pay National Insurance contributions at a higher rate. There is also a possibility you could lose entitlement to some state benefits.

Useful Links

Please refer to the following websites that I think you might find useful:
http://www.businesslink.gov.uk/
(Here you can answer a few basic questions to assess your NIC requirements)
http://www.thepensionservice.gov.uk/

Student Loans - Handle With Care

Starting off in life

It's fair to say that those infamous 'best years' aren't called the university of life for no reason. After all, most of us leave a little bit wiser than we went in and inevitably learn a thing or two about the real world, you know, how mould has the ability to grow almost anywhere and that you really will drink again no matter what you say the next day.

But are there more valuable lessons to be learnt?

The way I see it, leaving home, living & working with new people, having to fend for yourself and most importantly, learning the true value of money and how to manage it are crucial life skills.

But is the cost too high?

Call me crazy but mixing 18 year olds, the first taste of freedom and £6,000 cash a year seems to me to be a lethal combination. Throw in a few 2 for 1 offers on lager and the damage could be irreparable. With 83% of students taking out loans and 73% surviving on overdrafts, student debt is a serious issue.

How much are we talking?

Most students will be entitled to 2 types of loan:

(i) A fee loan
(ii) A maintenance loan

The amounts available will depend on individual circumstances but the maximum is in the region of £3,000 on each loan, ie. a borrowing of £6,000 a year. The fee loan is described as being a way to defer payment of the fees but ultimately increases how much you have to repay. To calculate an estimate of your entitlement visit the government calculation site.

Where does it all go?

One needs to be realistic. The cost of living is not cheap. Everything costs money, I sometimes feel I can't leave the house without spending money. So let's break it down:

1. Student tuition fees are currently around £3,000 a year.
   
2. Most of a student's maintenance loan will go directly on rent. Average accommodation costs are in the region of £60 a week. Assuming you pay rent for 40 weeks of the year, that's already £2,400.
   
3. Monthly bills can also make a dent. Regular household bills along with internet connection and mobile phone usage can cost hundreds of pounds.
   
4. Course text books are also a costly essential. Each new term brings with it a lengthy reading list (usually filled with course lecturers' masterpieces).


5. Food and drink and I'm not talking about the inebriating sort, that deserves a whole line of its own. A realistic budget would be in the region of £40 a week which again over 40 weeks amounts to £1,600.


6. Travel costs can also quickly mount, be it car costs, bus passes or taxi rides. A student bus pass in Birmingham costs £120 a term, which totals £360 a year.


7. Alcohol/Entertainment - priceless!


8. Clothes/Shoes/Personal Hygiene - at your discretion.

This link provides a useful tool to estimate your cost of living: Cost of living calculator

So it's easy to see how so many people struggle to come out of uni unscathed.

The student loan service is there to provide people with the opportunity to get a further education that they might not otherwise be able to afford, in the hope that their future earnings will be adequate to afford repayments. I'm not saying people shouldn't take advantage of the services but I am warning people to handle them with care. In the wrong hands, debt of this level can lead to decades of repayments at a time in your life when there will be far more important things to spend your money on. The temptation of living on credit can result in resentment as it becomes more and more difficult to remember where the money went. Worst case scenario, bankruptcy is an all too common option for students leaving university these days. An option that will destroy your chances of any credit rating for at least 6 years and close a lot of doors round about the time doors should really be opening up for people.

Payback Time

Borrowers will have to start repaying their loan as soon as they earn more than £15,000 a year.

This is when the reality of all those late nights and shopping sprees really hits home. A student who borrows £6,000 a year for 4 years will leave university with a debt of £24,000 assuming no overdraft facilities or credit cards are used.

In order to pay this off within 20 years (when you're likely to be in your early forties) you will need to repay around £150 a month, assuming a rate of inflation of 4.5%.

Top Tips

• Put any money you borrow into a savings account and limit the amount made available to yourself each month. Alternatively ask your parents to do the deed, I'm sure they'd be more than happy to help!


• If you have any surplus cash, try and make the most of it by storing it in a high interest savings account or a mini cash ISA.


• Avoid credit cards like the plague.
  
• Work part-time. This will not only increase your income but will also give you less time to spend all your money. Working in retail could get you good discounts and working at the university student bar means you still get to socialise but you can make money at the same time.
  
• Try and keep funds aside each month for those nasty bills that always arrive when you're least prepared.


• Be nice to your parents.
  
• Invest in a monthly bus pass or even better, cycle/walk to uni.


• Share books or make use of the local library or second hand book shops.


• Learn the value of supermarket food compared to convenience stores and take-aways. A little bit goes a lot further and you can even order delivery groceries.


• Regularly check your bank balance, preferably on-line, as it's important to be aware of your spending.
  
• Make a note of your big expenses, again, awareness is half the battle.
  
• Apply for a grant.......

Go forth and prosper

I'm not discouraging people from getting a university education, it's the best thing I ever did, but I am saying that exercising a bit of caution now will save a lot of stress later.

For more information about applying for student loans or grants, check out the government website: http://www.directgov.gov.uk/

House Buying Back to Basics

The biggest purchase most people will make in their lives is the purchase of their home. However, some people find it difficult knowing where to start.

One of our recent queries was from a friend who was tired of renting and wanted to buy her first home. While she had read quite a bit about different mortgages, stamp duty and interest rates, she was becoming increasingly frustrated with information overload! She wanted to know how to get started; the first simple steps she should take in order to start the process. Our advice to her was that buying property is essentially no different than any other large purchase, you really have to start by thinking about the basics. How much can I spend, what can I buy for my money and what am I looking for?

So with this in mind we have come up with three simple steps to getting started:

Step 1: Know your budget

The starting point has to be to assess a realistic budget that you can afford to maintain. The best thing to do is to phone your bank and arrange a meeting, preferably in person or by phone. This will get the ball rolling and give you a chance to ask all the questions that are on your mind. We would recommend making a list of things you want to discuss before proceeding.

All your bank will be interested in is your net monthly income and any outgoings you have. Your bank will then be able to give you a general idea of the size of mortgage you could afford and how much your monthly payments will be.

Step 2 : Know your market

I don't mean detailed research, simply the cost of houses and apartments in the area in which you wish to live. If you were buying a car of course you would know the difference between a Ferrari and a Renault Twingo!

Simply log on to a website such as myhome.ie or propertyfinder.com and get a feel for the prices in your area. Examine the weekly paper to see what you could afford, bearing in mind the information you received from the bank.

Step 3 : Know yourself

As banks become more competitive they seem more and more eager to grant mortgages to house buyers (the US sub-prime mortgage crisis was a direct result of banks lending too much money to people based on what they could realistically afford to repay).

While your bank may tell you that you qualify for a 200,000 mortgage, that does not mean you can afford it! Be realistic in the amount you can repay each month, bearing in mind your current lifestyle and the impact regular mortgage payments will have.

A good measure is 1/3 of your after tax income. You should also consider the effects of interest rate movements on your monthly repayments; if you don't have a fixed mortgage an increase in interest rates will increase your mortgage.

EXAMPLE:

Let's say that your bank tells you that you can borrow 150,000 and your after tax income is 2,800.

Based on our 1/3 rule the monthly repayments which you can afford are 900.

Now if interest rates are 4% your monthly repayment over 25 years will be 790. However should interest rates rise to 6% your monthly repayments would rise to 966.

This stress test should be used to ensure you will continue to afford your monthly repayments with fluctuating interest rates and changing salary.

The above payments were calculated using a mortgage calulator.

Buying Property in Abu Dhabi - 10 Good Reasons

We have just returned from a wonderful holiday in the United Arab Emirates visiting the well known shopping haven of Dubai as well as the lesser known capital Abu Dhabi.We have family living out there, so its a perfect way to combine a beach holiday with a family get together.

Currently the UAE is experiencing a huge boom in the construction industry and the Dubai skyline is littered with giant cranes. They are in the process of contructing the tallest building in the world, which when finished, will be more than half a mile (800m) tall with 160 floors, incredible! Many people are familiar with Dubai's booming property market with projects like Palm Island and 'The World' attracting huge media interest. The Dubai "ship" has to some extent sailed, with the massive gains (up to 200%) of the early part of the decade, now being replaced with more modest growth as supply catches up with demand.

Abu Dhabi

We have a personal interest in the property market, having bought property in Abu Dhabi last year. Until August 2005, the property market had not been open to non nationals, but new laws have opened up the market to all buyers. Recently, further changes in legislation have upgraded property from leasehold (similar to properties in London whereby the purchaser simply buys the right to live in the property for a period of time usually 98 years) to freehold which means the buyer now owns the property outright and forever.

Ten Good Reasons

1. If you buy an apartment or house in Abu Dhabi to let out for rental income, you will not be charged income tax on the rental income you receive.
2. Rent is paid annually in advance which means you will receive a full year's rent in January for the forthcoming year. Leases tend to be long term and this means a steady reliable income stream.
3. When it comes to selling your property there is no capital gains tax payable in the UAE.
4. Unlike elsewhere in the world, you pay no stamp duty on Abu Dhabi property.
5. The only charge of any significance that you have to factor in is the 1.5% land registration fee which is payable upon completion.
6. The UAE Dirham is directly pegged to the US Dollar, therefore as the Dollar rises and falls so does the Dirham. As the value of the Dollar is so weak compared to the British Pound and the Euro, any payments made to the UAE from the UK and Ireland will be enhanced. Our apartment will cost us 20% less than we first thought, due to the currency movement.
7. Abu Dhabi, the capital of the UAE is a beautiful city. With year round sunshine, a beautiful coastline and some of the world's most exclusive hotels, it makes an ideal holiday destination. In the next few years it will host Formula 1, build the only Louvre museum outside of Paris and also boasts the largest hotel in the world; the Emirates Palace. The launch last year of Etihad Airlines with direct flights from Abu Dhabi to Europe, the Far East, Australia and America has also made it a more attractive destination.
8. The demand for rental property in Abu Dhabi is increasingly strong and steady due to the constant increase in the number of residents. Over 200,000 new residents arrived in Abu Dhabi last year alone, one of the main factors which has resulted in the demand for rental accommodation far outstripping the supply. As a result, high rental yields are very achievable; in 2006 they exceeded 15% and with the development of local industrial hubs as well as two new airport terminals this trend is forecast to continue.
9. Capital growth has continued to exceed expectations, particularly in the last twelve months, and is expected to level out at 15% per annum at least for the medium term. The bank we bought our apartment from has started reselling the apartments, to a small number of investors, and prices are already 15% up after only 14 months, and the property is still off plan.
10. The build quality, architectural standard and finish of all construction work in the Emirates are excellent, with world class attention to detail. Some of the security and technology features on our apartment are simply incredible.

For more info on Abu Dhabi or property abroad please email us.

US sub-prime crisis - what's it all about?

Introduction

The sub-mortgage crisis started when US mortgage companies made loans worth hundreds of billions of US dollars to individuals who are unable to repay their mortgages.

The mortgage companies then sold the debts to financial institutions around the world, who in turn sold them on to pension funds and hedge funds. As the debts moved up the financial chain, investment banks repackaged the mortgage debts into complex structured products that were given a low risk market rating despite buyers not fully understanding the implications of the products they were investing in. As a result, it is impossible to determine where the debts that cannot be repaid are within the financial system and when the crisis first came to light the level of exposure was completely unknown.

This uncertainty has led to a collapse in investor confidence and means that the banks and financial institutions are reluctant to lend money. In response, banks are limiting the amount of money they lend and have increased interest rates on loans as a disincentive to borrowers. In addition, short term loans worth hundreds of billions of dollars are being recalled by banks in an attempt to reduce their exposure to credit risk.

There has been a lot of criticism about the credit rating agencies who certified many of the bad debts which have been bundled up and sold. There is a growing move to tighten up international regulation of the financial sector in order to reduce the risk of this type of situation arising again.

Implications

A recent example of the knock-on effects of the increased borrowing rates is Northern Rock. Unlike most UK banks, it raises the majority of its funds via the global wholesale credit market, which as a result of the US sub-prime crisis has dried up. Therefore, they are now finding it difficult to raise the cash to pay for additional mortgage lending which constitutes a major part of their business. As a result, it will be more difficult and costly for customers to get a mortgage. This in turn has reduced the rate of house price inflation which until recently seemed to be unstoppable.

There are already signs of an economic slowdown in the US, the world's biggest economy which are likely to penetrate the European and Japanese markets. The UK, as a major exporting nation, would also be affected as importing in other countries would reduce in light of the downturn.

On a more positive note, people will be encouraged to save money as the higher interest rates are more attractive, which in turn could lead to more long-term, stable investments.
Some also believe that an economic slowdown in the US could help re-balance the world economy, which has become overly dependent on the US as the driving force of world economic growth.

FinLowe Family Finance Day One

Hi,

Firstly we are delighted to welcome you to our blog, FinLowe Finance. The origins of this blog are many and varied, from sisters who blew the budget on credit card shopping to friends who needed advice on health insurance and pensions and to parents who were keen to pay the tax man as little as possible.

As qualified chartered accountants we have worked in the financial services industry for many years. The one thing that has always struck us was the mystery surrounding finance, tax, investments, pensions and all the financial jargon that we hear day in day out. What we are hoping to do is to provide a forum where we can answer specific questions, post interesting articles and attempt to demystify the world of personal and international finance.