Where Does It Go? – UK Money Blog £

Guest Post from What About Money? a website run by the FSA of the UK to help 16-24 year olds understand money.

Savings and investments

In our grandparents’ generation, saving a good chunk of each pay packet was standard practice – and the reason why was very simple. In those days, there were no such things as credit cards or store cards. And personal loans and bank overdrafts were not normally available to the average man on the street. This meant that if you wanted to make a large purchase, such as furniture or even a motor car, there would only be one way to do it – save.

Saving: A timeless habit

But despite the borrowing options open to the over 18s today, saving is still the best way to buy anything you need. Not only do you stay out of a debt (which means you won’t have to pay interest), but by saving you can earn interest instead on your money making you richer still.

Even if you are not saving for anything in particular, putting money aside each month – even if it’s just £10 or £20 – is a great habit to get into. Having a little bit of cash to fall back on gives you choices and freedom.

But stashing your cash under your mattress, or even in your every day current account, is no good as you won’t be earning interest on it. Instead put your money into the right savings account.

Where should I save?

As soon as you hit 16, you will have to save in an adult’s account where, unlike a child’s account, tax is payable on any interest you earn. However, the tax man does allow every resident adult in the UK to save a certain amount tax-free in what’s called an ISA (Individual Savings Account).

For this tax year (to April 2009), the amount you are allowed to save before you have to pay tax on interest is £3,600. For this reason, an ISA is always the first place to start saving. But make sure you find an account that pays the best rate of interest by doing some research online first.

What’s best for you?

If you are lucky enough (or just work hard enough) to have more than £3,600 each year to put aside, it’s time to look at other kinds of savings accounts. A regular saver with instant access to your funds is the most straightforward – though it may not pay the best rates of interest, especially if you do not save the minimum required per month.

If you don’t want access to your money for a year or two, fixed rate bonds tend to pay better rates of interest. But if you change your mind and withdraw your money during the term of the deal, the interest earned could be wiped out entirely.

You may also prefer to use an online savings account but – especially if you are already prone to internet spending – bear in mind just a click of a mouse could undo all your hard work.

Most people never have to worry about this but if the bank or building society you are saving with goes bust, the Financial Services Compensation Scheme (FSCS) will protect the first £50,000.

Investing on the stock market

When it comes to money management, saving is always the best place to start. But while the process is rewarding, it is slow and steady too. That’s why, in addition to their savings, some people choose invest the money. Essentially, investing is saving for the long term (usually over five years) but with the hope of getting a better return..

You can invest in different ways, for example buying shares in companies. But there are other options such as property and fixed interest investments (these are where you loan money to companies or the government and you get interest in return). But investing is a complicated process and novice investors usually don’t pick these investments themselves.

Instead they invest in a fund, like a unit trust, that pools your money with other investors and spreads it out in different areas on the stock market. The fund could invest just in shares, sometimes focusing on specific sectors such as large UK or European companies. In addition to funds that invest in shares, some focus on property or fixed interest whilst others may spread across all three types. But the detail is left to a fund manager whose job it is to literally manage everyone’s money.

Depending on this fund manager’s choices, and the state of the markets in general, the value of your investment can go up and down. But, as you would expect, the service is not free. The fund manager will charge a percentage of the market value of the fund every year.

If you find that you get the hang of the markets, you can even ‘stock pick’ yourself. But, to use a familiar phrase, you’ll have to do your homework first.

There are various places you can review internet banks to see which will be best for your needs.

According to research carried out for Guardian money, if your household is a high consumer of electricity it could save £300 a year on bills if you switch to Economy 7 electric tariff.

Economy 7 became popular in the 60s and 70s when consumers were encouraged to use a cut price tariff at night to use excess electricity generated by coal and nuclear power stations that have to be kept running at night even when demand is low.

It has fallen out of favour recently, mainly being used by flats with night storage heaters that charge up during off-peak hours – typically from midnight to 7am. This time could be used by appliances such as washing machines, dishwashers or bread makers.

Suplliers maintained that if you use 20% of your energy needs during the off-peak times, you would make a saving. However, TheEnergyShop.com foudn that figure is closer to 40%

It takes habits to change – switching on your washing machine as you go to bed for example, but some households swear by it. Some maintain it also means a lower carbon footprint.

Do your sums before hand though – I had Economy 7 in my old flat for the night storage heaters, but found no significant saving due to the daytime charges being typically higher than normal, to offset the cheaper night rate.

Carrying on with our series on where does your money go, lets use those figures from the post – How Much Money The Average UK Family pays in tax

That post concluded, after income tax and all the other tax such as VAT the average family pays £201.34 in tax. Bear in mind this is last years figures, now we own half the banks our public debt is a lot higher – we’ll cover that next.

But how much has been spent already? From the Guardian money wall-chart we can get a rough idea.

Of our money given in tax in 2007/2008:

• 18% to the Dept of Health
• 10.3% to Education
• 23.3% to work and pensions
• 21.3% for benefits
• 5% for debt interest – this is obviously going to be a lot higher in 2008/2009
• 6% to the Ministry of Defence
• 3% for transport policy
• 5% for Scotland
• 2.5% for Wales
• 1% for Northern Ireland
• 3.6% for Universities
• 3% for Tax Credits
• 1% to decommissioning Nuclear Waste
• 0.5% for Iraq/Afganistan Wars
• 1% to Policing

Using these figures, an average family earning £32,799 a year contributes, each week:

• £36 to the NHS
• £21 for our schools
• £47 for the OAP’s
• £43 for those on benefits
• £10 on the public debt interest
• £12 for the Army, Navy and Airforce
• £6 for the roads and rail
• £10 for Scotland
• £5 for Wales
• £2 for Northern Ireland
• £7.25 for Universities
• £6 for tax credits
• £2 storing nuclear waste
• £1 the Iraq/Afghanistan wars
• £2 for the police

Thanks to Burning Our Money who put me on to the Guardian chart showing how our taxes are spent by the Government – the full pdf can be seen here.

I’ll be pouring over this chart and looking to use it as a road map for investigation in coming up posts.

The name of the site is Where Does It Go, so here is a some information on where your money goes in regards to tax.

According to a BBC survey in November 2007, the average income for a family with 1.9 kids is £32,779, or £630 a week.

Assuming 22% tax (20% in 2008) this equates to a family paying £126 income tax a week.

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But we’re not only taxed on income, we’re taxed on our outgoings as well via VAT – using the VAT calculator I took some rough figures from the above graph to give a back of the envelope guestimate on how much we pay out in tax indirectly through spending.

We currently pay 0% tax on:

• food
• books, newspapers and magazines
• children’s clothes

And a reduced rate of 10% on:

• reduced rate
• fuel power
• energy saving
• residential conversions

Everything else is at standard 17.5%.

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As can be seen from the above BBC chart, the average spend per week for family – £601.20. Broken down I included how much we can expect to pay in tax for each area:

• Food – £60 – No tax
• Alcoholic drinks/ cigarettes – £15 – Tax: £1.50 (Source)
• Clothing – £35 – children’s clothes no tax; assume adults get £20 taxed at 17.5% – Tax: £2.50
• House fuel – £45 – Tax: £2.25
• Household goods – £40 – Tax:£5.00
• Health – £5 – Tax:£0.85
• Transport – £80 – Fuel tax of 80% (Source) – Assume petrol is £40 – Tax:£30
• Communication – £15 – Tax: £2.62
• Recreation – £80 – Tax: £14
• Education – £20, Assume they are books – No Tax
• Restaurants/hotels – £45 – Tax: £7.87
• Misc goods – £50 – Tax: £8.75
• Other – Mortgage interest, holidays, fines, licences – £105 – assume no tax

TOTAL: £75.34
TOTAL INCLUDING INCOME TAX: £201.34

I have tried to err on the side of caution in assigning rough figures, if you have suggestions for modifying this please let me know.

In conclusion: 31% of your money goes straight back to the government. How do YOU want it spent?

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Resources:

Learn more on VAT here
VAT calculator