A Mouse Saves For The Day (Financial advice - birth to death)

Member Name: marandina

Product:	Financial advice - birth to death
Date:	05/05/02 (127 review reads)
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From birth to death is such a big area that it would fill a whole lot of books on how to go about coming up with a plan to encompass all eventualities. All I can really do here is give you the benefit of some of my experience on the savings side although I’ve included a few suggestions at the end to give the whole thing a rounded look. It is the savings side I want to emphasise which takes up the bulk of the opinion.

Sadly, for much too long basic financial planning has been omitted from the school curriculum resulting in a generation of folks relying on others for advice. This dependency culture has had some insidious off shoots in terms of the pension mis-selling scandal and the ongoing furore over endowments. Whilst both are relatively complex areas there are moves afoot to introduce the principles of budgeting and rudimentary financial planning at school age.

I'm not here to give you any pointers regarding pensions and endowments but what I can do is give you a bit of a steer with basic savings planning.

Of course, as soon as you start typing a banking & finance opinion you know that the majority of your audience's eyes will start to glaze over. So to counter this, I've enlisted the help of Danny the Dormouse who's just left the nest and got his first job at a cheese locating plant (he tried out for the Aero advert but lost out to a more talented mouse).

Danny has received his first pay packet. You may be surprised to know that mice do get paid in cash as opposed to any other form of embellishments. Have you never noticed that mouse standing next to you in the newsagents buying the Mousy Times with the headline story about "Rampant House Cat attacks Mouseville overnight" ?

So Danny's armed and ready to save – what's a mouse to do?

***Basic budgeting***
He needs to work out how much he can afford to save. Struth, what figure will apply? The easy way to work it
out is to put together a basic budget. In simple terms, all Danny needs to do is list his income and outgoings and calculate what is left over by taking the totals of each away from each other. So, for example, Danny has a monthly income of £1000 and his outgoings come to £500. In theory, he has £500 a month to save as long as he's included everything (often little luxuries get left out of budgeting e.g. trips to the cinema, alcohol and so on). He'll almost certainly have under-estimated his outgoings, as most folks seem to put the squeeze on this figure when everything but the kitchen sink should be included.

OK, we'll assume that Danny's allowed a reasonable monthly donation to his mum (ahhh) for looking after him all these years and everything else is on there too. So he really does have £500 a month. Sacre bleu! He hasn't allowed for his planned trips to the mouse disco (do they still have discos?). After all he's young and kinda cool so why shouldn't he strut his stuff and put on his white J.Travolta outfit?. Last minute re-calculation and we've now ended up with £250 a month (he's gonna spend a lot of time in these discos).

***Portfolio planning***
Danny's decided to work out how to save himself, shunning the offer of advice from other sources. He could have gone to the Mousy Building Society and seen one of the staff or even the Mousy Bank PLC. There are plenty of mice qualified as financial advisers but he's trying to save on the one-off advice fee they'll charge or even the commission that they'll take from any plans they sell him.

Danny has decided to work from a rather helpful magazine he bought in WH Smiths (told you that you may have noticed a mouse queuing up next to you) that features a section on portfolio planning. Blimey – what's a portfolio? Well, all a portfolio is a sort of overall plan for the total funds that you have. You can split the funds into dif
ferent compartments within your portfolio according to your own requirements.

Probably the easiest place to start is to work out your contingency fund. In essence, this is money put by for emergencies or known planned expenditure in the foreseeable future. Different people have different views as to how much to put to one side. I'd maybe recommend 6 months wages bearing in mind just how low state benefits are if you are unlucky enough to be made redundant or fall sick for any length of time. In Danny's case his contingency fund or as he prefers, rainy day money comes to 6 x £1000 = £6000. Once he's worked this out then everything else should fall into place.

So what's this portfolio gonna look like? Well, the easiest way to picture it is in terms of separate pots – a pot for the short term i.e. rainy day money, a pot for medium term and one more for long term.

***Short term**
This can be seen as anything from immediate access to foreseen expenditure within 12 months. Examples might be planning for next year’s holiday to drinking money for the weekend mouse disco. You may even need to have a plan for anticipated expenditure at your local MacDonalds (as one Community Guide told me was his financial priority). There are plenty of options available to home your short-term funds:

 Current accounts are the most popular option usually designed to receive salary credits and coming with chequebook, cheque guarantee and standing order/direct debits to pay those bills. Interest rates vary greatly but you'll find the best deals with the online banks that can cut back on their overheads to pay more interest (although you forgo access to branch networks).

 Cash ISA usually pays a good rate tax-free and most are passbook based with instant access.

 Telephone accounts also pay good rates, as they don't have to worry about providing High St outlets. These are usually
easy to operate and rely on a telephone/postal relationship incurring a delay in transactions subject to the vagaries of the postal system.

 Notice accounts may be an option if the notice lets you get at your money reasonably quickly. Alternatively, you might want to think of these as more medium term if notice is anything like 90 – 120 days.

 Online savings accounts are increasingly in vogue. Sometimes linked in with current accounts, these offer higher rates and can come with a card option allowing you to withdraw at cash machines. Typical providers include Nationwide and Halifax with the breakaway e-banks like First-e failing to gain a foothold in the market.

***Medium term***
You may want to think of medium term as anything between 1 – 3 years. Options available include:
 Notice accounts as mentioned above.

 Fixed rate bonds. These offer anything from 6 months to 3 years and over based on a fixed rate return. Withdrawals are often restricted so you need to be fairly certain that you can tie your money up in this way. Of course, the return is known so you can plan for the future with some certainty.

 Monthly savings accounts offer higher rates for those committing a set amount each month and accepting restrictions on withdrawals (often 1 permissible per year). These are often used to save for holidays and the like.

***Long term***
Generally seen as 5 years or longer. Most folks will want to put some money into a long-term pot to generate growth. It's not a good idea to stay in short/medium term accounts for this length of time as the impact of *inflation means that, in reality, your money will hardly grow and may even decline in value in real terms. An example might be investing £5000 in an instant access account for 5 years. If the average rate of inflation remains low at 3% on average and the account pays 3% after tax over the 5 year period
(assuming you are a tax payer) then their will be no real growth as your funds have merely stayed static after allowing for inflation. There are better options:
 Guaranteed Bonds are stock market investments offering guarantees on your original stake. The guarantees mean that the potential return is lower than other types of stocks & share based investments as the guarantee is paid for by the company off-setting the cost by investing in other secure forms of investment (e.g. gilts)

 Stocks & Share based products. In the last 100 years the **FTSE100 has only failed to outperform deposit based investments in one 5-year period. A lot of folks go into a mad panic at the mention of S & S but they are usually hampered by ignorance. Stock market returns can fluctuate going up as well as down but over the long term they don't have to do much to outperform short-term accounts. Many S & S products are ISA wrapped allowing a tax-free element to the return. ISA stands for Individual Savings Accounts and within annual Inland Revenue limits allow returns to be free of tax. Returns on shares can be seen to stem from ***pound-cost averaging theory which is covered in the notes.

 Corporate Bonds offer an alternative. These are effectively investments that become a loan to certain companies that, in return, agree to pay you a return. The rates increase according to the standing of the company, as the real risk involved is of the company going out of business in which case you may lose your money. Due to this you would expect, say, a Marks & Spencer Corporate Bond to offer a lower return than a fledgling company as M & S is a blue chip company that has been around for years (of course, it could still go out of business!). Some bonds offer monthly income particularly useful to those approaching retirement.

These are just a few examples of what may fall into each pot. Within your plan you'll need to consider your own circum
stances and priorities. If you are close to retiring then you may consider guaranteeing returns and generating monthly income a priority. Accordingly, you may choose to avoid riskier investments like S & S. However, you may just be starting out like Danny and have your whole life ahead of you. You can afford to add more risk to your plan knowing that you have plenty of time to play with bearing in mind pound-cost averaging mentioned below.

Well OK, Danny's worked out a portfolio and is armed with his plan. He's feeling good knowing that his money will be working harder for him and he's saved the cost of advisers. He's decided to review his plan every 6 months knowing that products and markets change all the time and that it will be hard to keep his plan performing at an optimum because of this. However, he hasn't got the time to be obsessive and change things around every day.

Danny says that if you are in any doubt, then there are plenty of sources of help. There are the Banks and Building Societies friendly staff, financial advisers and even online resources. As ever the watchwords are to shop around, as it's a competitive world out there as he realised when he went for the Aero trials.

Here’s those balancing tips to encompass from the cradle to the grave ethos...

 Always shop around for financial products even mortgages. You WILL pay the price for inertia. There are so many sources to choose from e.g. money sites online, brokers, banks, buiding societies, financial magazines etc.

 Try to read the financial pullouts in quality papers like The Sunday Times. I’ve made a fortune from carpetbagging (shocking, I know but we are talking literally thousands of pounds) i.e. investing in organisations that subsequently float on the stock exchange and hand you a bag load of free shares in the process. I never actually vote on whether a company should float as this seems morally
wrong but receiving the bunce if they do isn’t (in my book anyway).
There is loads of other stuff too like best buy tables for savings accounts, mortgages, credit cards etc and all manner of general financial information available from competant writers. You'll get a feel for what's happening with the stock market, budget implications, tax-saving pointers and the like too.

 Take extreme care with debt in general. Review it regularly with someone in the know to make sure that you have the cheapest rates possible.

 NEVER spend more than you can afford. This is where the majority of folks get into the debt spiral and start robbing Peter to pay Paul (no, not me an imaginary Paul sadly). If you ever do get into debt then Citizen's Advice should be able to help.

OK, I’ve taken far too much of your time already. Danny's final word is that he thinks that he is much more talented than Stuart Little (you should see him dance) and hopes that you agree. He also hopes that you found this at least a little helpful and may appear in future B & F ops if you are still awake to tell him.

We both thank you for reading and have a great Bank Holiday. I certainly will!!

Marandina

*Inflation is a general increase in the price level of goods and services. Unexpected inflation tends to be detrimental to security prices, primarily because it forces interest rates higher. There are a number of different indices measuring inflation one of which is the Consumer Price Index (CPI). This is a measure of the relative cost of living compared with a base period (currently 1982-84). The CPI can be a misleading indicator of the impact of inflation on an individual because it is based on the spending patterns of an urban family of four.

**FTSE100 = List of top 100 companies listed to disclose share price based on overall asset size i.e. how big the company is. FT is Financial Times.

*
**Pound-Cost Averaging Theory ~ see my op entitled "Roald Dahl’s Taxing Affairs" at Home > Banking & Finance > Financial Services > Taxes and Financial Advice > Tax and Tax Free Investments

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