Where Does It Go? – UK Money Blog £

At the moment how to spend £10,000 from say inheritance or another windfall is a surprisingly hard question. The classic answers such as ISAs, property or shares have all taken a pounding in these last few months.

ISAs

These are tax free accounts which typically have high rates of interest to encourage you to put the money away for 12 months. At the moment these are looking around the 3.5% mark, if you leave it in for a year. If you draw out the money in the 12 months, a lot of accounts will only pay you around 1% on your money.

This is not just a low rate, you could actually lose money in real terms – with inflation running at 3.2% any money put aside not earning any interest will devalue that amount.

Taking inflation into account your 3.5% ISA could in fact only be getting 0.3% a year in real terms! On £10,000, you would earn a paltry £30.

This would be better than leaving it under the mattress though, but only just! Its all to do with the government trying to encourage you to spend your money on goods to help kick start the economy.

Property

For so long the easy option if you had the money, property prices have plummeted over the last 12 months, with some predictions saying houses will lose 50% from their peak. Even if the house price crash had never happened £10,000 wasn’t enough for a sensible deposit if you wanted to stay away from the 100% mortgages (which with the hindsight of history would have been a GOOD thing).

Suffice to say, if you can buy at the moment you may pick up some bargains compared to recent years, but don’t expect your property to be sold for profit for a good few years, maybe even 10 years. This will probably mean you buy to live in the house, which is really what buying a house should primarily be for; the culture of get-rick-quick by investing in property must be held accountable for half the trouble of what we’re in at the moment.

Shares

If property prices are bad, then shares are an even more tragic affair. The FTSE which tracks the 100 best performing companies in the UK has crashed from peaks of 6500 to around 4000 today, and no one knows if that is the end of it. Saying that there are some shares thatt have bucked the trend, so if you’re a financial wizard or someone who knows something every other share trader doesn’t, you may still have a chance to make some money, especially if you manage to buy a stock at a current low and it soars upwards over the next few years – but with the current climate that £10,000 invested could equally end up as £0 once the company goes bust.

A good overview of shares verses house prices over the last 20 years is found at Fool’s new site, LoveMoney, which states:

If I were to summarise these results, I would say that both asset classes have produced useful returns for investors since 1984, with shares winning by a nose. However, the FTSE 100 is considerably more volatile than house prices, so investors in shares need to be patient in order to ride out the fairly frequent setbacks which the stock market springs on us.

So, all being told, where would my £10,000 go?

• I’d concentrate on clearing all debt, thats a no-brainer these days. Why pay 7+% on a loan if any saved money is only getting 0.3%?
• Buy anything you’ve been thinking of getting for a while, taking advantage of the temporary 15% VAT (and also do your bit to save the country from financial Armageddon)
• Look to invest in people or business – if you’ve got a good idea, now may be the perfect time to lend money to an idea you think will succeed, since banks are being so tight with their money.
• Buy things that will increase in value over time – antiques? Limited edition items? Art?
• Go on that holiday trip of a lifetime. May as well enjoy the world in a cheaper country whilst you have the chance.
• If you have a mortgage, try and overpay as much as possible for when those interest rates will rocket up in the future

Those are my suggestions, if you have any other bright ideas, feel free to say underneath – I think we could all do with some!

Got some interesting statistics from the FSA this week about how much the average 20-something spends on a night out – find out more at www.whataboutmoney.info, a financial site set up by the FSA to help young adults with their finances. They say:

New study reveals the true cost of going out

The Real Life Costs Report* from What about money? found young adults thought they were spending nearly £60 a week on socialising, but in reality young adults are more likely to be spending more than £90 on ONE night out (£92.22 UK average).

The report reveals that many of the UK’s young adults are going out more than one night a week, which could result in spending up to as much as £547 per month just on nights out on the town. That’s over half (53 per cent) of their monthly expenditure on having a good time and a possible £6,570 spent on socialising every year.

This makes for an annual socialising bill of more than £47 billion amongst the UK’s youth population**.

The research found that in the current economic climate, young people are trying to manage their money better but despite their best budgeting efforts, many are getting caught out by the unplanned costs that usually boost the final price tag of nights out.

Over half (53 per cent) said they buy new clothes for a night out but many said they purchase shoes, make-up, and new haircuts adding an average of nearly £30 to their overall spend for a night on the town. It’s easy to see how extra ‘hidden’ costs can stack up!

How did they break this down? Well, according to the study the average 20-something spent:

Young adult cost of a night out…

• Getting ready, e.g. hair, beauty and clothes etc – £28.31
• Drinks -£22.39
• A tasty night-time snack, eg. kebab, chips, bar food and takeaways – £16.42
• Going out and getting home, eg. public transport or taxi fare – £13.23
• Entry to a club, gig, bars and other events – £11.87

TOTAL (night out) = £92.22

I suspect this figure may be gender bias, given the emphasis on the “getting ready” budget. Rebecca Filletti, a 23 year old trainee barrister from London said:

“It can be tricky to budget for a night out as you sometimes forget about the small things you spend money on – the cost of haircuts, clothes and make-up can all add up, but you don’t consider them part of a night out. Plus added extras like taxis or food on the way home can all mean you spend more than you originally planned to.”

Quite, but compared to my last evening it sounds like Rebecca here was attending the Proms or some such – I find it pays to just take cash out with you and not your card to avoid the temptation of drawing that extra £20 – admittedly I can walk to most entertainment nearby so don’t have to incur transport costs.

It sometimes galls me considering how much a person’s life is spent earning for those couple of hours a week where they can really let their hair down, it seems the way things are set up is too put young people into debt so they have to work the rest of their lives to pay it off – take the Student Loans for example, where only 20 years ago University was free to most, we now of course have University Fees (unsuccessful campaigned against when I was a student)

I made many mistakes when I was 21ish with money that I’m still paying off now – I suppose it is part of the learning process. For instance, taking out a loan with the bank with PPP(which basically you paying the bank to make sure they get their money if you ever go unemployed), running up large overdrafts and not shopping around for deals – all really due to lack of education. I’d be an advocate of basic money sense taught in schools, more so than it is currently, but could the school system just be factories for turning out good little workers for the country these days? (league tables, tests and subjects that work well commercially pushed over arts/fitness)

At any rate, I fully support the intention behind www.whataboutmoney.info so check it out if you’re 16-24 and looking for help, although I suspect if you’re on a personal finance blog you’re probably pretty clued up already!

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If you’re interested in the area breakdown for the study, they were:

Money Spent On Night Out
UK Average – £92.22

• London – £93.13
• Yorkshire & Humberside – £82.44
• North West – £91.41
• North East – £80.84
• South East – £88.71
• West Midlands – £90.02
• East Midlands – £78.39
• Northern Ireland – £99.95
• South West – £94.66
• Scotland – £97.35
• Wales – £87.83
• East Anglia – £98.54

*All figures, unless otherwise stated, are from 72 Point. Total survey sample size was 2,000 and was carried out on-line.

**Figures based on current number of 16-24 year olds in the UK (7,220,400) and average annual earnings of this age group in 2008 (£12,313). Data provided by Office of National Statistics.

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

Carrying on with budgeting help, I came across this method named “Snowballing” which offers psychological methods to pay off debts.  If you have several debts, such as loans, credit cards and overdrafts you can use this method by paying the minimum fees on each, then using any remaining cash to tackle them one debt at a time.  You can choose to tackle the debt with the lowest balance (psychologically nice) or highest interest (mathematically best)

There is a Snowball Calculator around that can help you work out how much to save I think I’ll check it out.

Tags: budgeting, calculator, tools