A Public Service Announcement for the Middle Class in the Public Sector who are about to lose their job

I did wonder about this post, because I am sure there will be some who will deem it to be heartless and in poor taste. If you fall into the category addressed in the title and want to hang on to your sense of entitlement then I’m afraid that I’m probably guilty as charged in your eyes, and you probably ought to stop reading. If, on the other hand, you want some things to think about that could materially improve your situation and save you charging down some blind alleys, then hear me out.

So who the hell am I and what do I know? Some background. I ran a web design firm from about 1995 (yes, that early) to 2005-ish. All on the side while still working at my main job. You see, I am a slight oddball – I craved the stability and security of regular employment, but I was intrigued and excited by being able to make stuff happen without going through all the processes you have to in a big company. Because I did it on the side, I was limited in the amount of time I had, but on the other hand it meant that when I dealt with my main customer(s) I could work with them to shape some of the requirements to the art of the possible, and it was a good match. I got to save their tail a couple of times including once when they were over-hasty with the delete key and my company was profitable every year it ran, what’s not to like?

In the end my main customer after many years decided to insource the work and I was happy to let it go, there are only so many hours in the day and as you pay your mortgage down you need less money, paradoxically at the time of your life when you are earning more. I’m not the world’s best salesman, so I enjoyed looking after that customer, but if was DGF in her guise as a former GF who won the business. She can sell things while I am left open-mouthed in amazement at “how did you get them to go along with that?” I enjoyed following up with the customer and making them feel looked after, and of course making money and at the time hacking code and databases and server backends and all that cobblers. If I’d wanted to carry on I’d have chased more sales, there were opportunities, but not enough taime.

So I am an unusual mix – a salaryman/company man according to ERE-speak and yet also entrepreneur (craftsman in ERE’s taxonomy) colonising new ground – the Web in 1995 was a very different place than it is now.

This is not a common combination. And judging from the number of CVs I received as company director and the number of company men that I see from the public sector and voluntary sector fumbling about after redundancy, I see certain mistakes repeated again and again. I list some of these traits, and my own take on them here. I really and honestly do not intend to be mean, however, I am a firm believer that if you look at the world as it is rather than how you’d like it to be you will get further, or at least expend less energy staying where you are!

Fate Helps Those that Help Themselves

Since 2007 the drumbeat has been rolling out that something Really Bad is happening to the economy. The time to start preparing for losing your job is at least two years before you do lose it. It’s 2011, that bell has been tolling for three years already. It tolls for thee. How do you help yourself?

  • Cut spending
  • cut debt – yes, including your mortgage. Because of the threat of redundancy seek ways to buy repayment holidays or pay an offset, or save elsewhere against not being able to pay the mortgage.
  • start saving
  • start looking at the jobs market
  • if you want to start a business then work out what it will do and the marketplace/competition
  • start learning new skills if appropriate
  • eliminate frippery
  • eliminate unnnecessary expenses
  • don’t buy too much house
  • consider renting – it is more flexible than owning if you have to move for work
  • study your company and its accounts. Which areas are doing well? Is yours one of them? Is there an obvious competitor that may take your firm over, or one that your firm may take over? Without fail mergers are never good for employees.

If you know you job is under threat, Cut Spending – now

Ever wondered why finance directors of a company in trouble issue edicts to slash spending even on paperclips and travel first and start making people redundant even if it seriously hits business?

It’s because any entity under financial pressure can improve its situation at a stroke by reducing spending. The other side of the coin, increasing income, takes time and effort to come through, so if you are hit by a financial shock cutting spending gets you results, fast. No newspapers, no Starbucks lattes, cancel the Sky TV, take down all nonessential spending. You can ease back on that once you’ve digested the shock and what it means for your finances later.

Self Employment is not an easy alternative to Employment

If you have the Entrepreneur’s itch you wouldn’t have been in employment half your working life and worrying about your upcoming redundancy. You’d be out there running your own business! So many people think that just because they are finding it hard to get a job that they can simply start a business instead. If you are starting a business because you want a job you are going the wrong way about it. You need the idea, the entrepreneur’s itch, you need to know how and why what you will be selling will make life better/easier/cheaper/faster for your customers. And then you need to find a way of making or doing it in a way that turns a profit. Start with the customers and the product or service, don’t start with your need for money. That’s right – start with your customer’s needs, not yours! Your customers have got the money, and they don’t give a damn about your need for money – they care about their needs. If you want them to help you then look after them first.

You can live on a lot less than a your salary.

Note I said can, not you will enjoy it. But living below your means is the key to an awful lot in personal finance. Living on debt is living above your means, and you are borrowing from your future self to make your present self richer. Not everybody can live on less than their salary, but the middle class can.

Your living standards will fall in the coming years

Britain has been living beyond its means for almost two decades, and the repo-man is coming along. If you aim to preserve your current standard of living and it takes all your salary, it is going to take more than all your salary in coming years. That is not a sustainable position. Adjust speed and heading accordingly. Or brace for fatal impact with reality.

The world does not owe you a living

Just because you were doing well doesn’t mean to say you will continue to do well. There are steps you can take to secure your future, but all of them mean setting aside money now to use later. A belief that the world owes you a living is one of the most truly incapacitating beliefs in personal finance. Don’t do it to yourself.

You need capital to start most companies

It’s the #1 mistake that I hear from people who have been company men. They think like company men, and the reason you and I work for a company is because we lack balls. The balls to stick our necks out and take risks and chances in this aspect of life. Well, if you want to run your own company you are going to have to start taking risks, and one of the first risks you are going to have to take is with your money. What money? The money you have been saving hard ever since 2007 when you saw the writing on the wall, FFS! Don’t give me the “oh I think I’ll borrow it from a bank”  line. Why the hell should a bank advance you money if you aren’t prepared to put your own skin in the game? Got no money? They may be okay with a charge on your house. Don’t want to risk your house? Well, you should have saved some money up then! D’oh!

My web design company was one of the few types of company that was possible to set up with no extra capital, barring the setup costs to Companies House, and the computer I already had. It was because it was selling mind – intellectual capital, the organisation of bits on a webserver somewhere. These opportunities are few and far between, and there are a lot of keen young Indian chaps who can do the job for a lot less than you can…

When somebody introduces themselves as ‘self-employed Consultant’ to me I mentally make the substitution ‘Unemployed’, because they tried to start a company without capital. It works 9 times out of 10… Real companies have assets, and it takes capital to get assets. ‘Nuff said. Money begets money. Rich people buy assets that they use to make money. Everybody else spends money on stuff. It ain’t nice, it ain’t pretty, but it’s the way the world works.

The time to start acquiring capital is while you are employed

Spend less than your earn. There’s no other way of building capital with a decent likelihood of success and a decent likelihood of staying out of prison. Once you have some you may be the next Warren Buffett but even he had to start with some capital to make more. Financial capital isn’t the only type of capital – skills are another. It takes time to acquire either. This is obviously a tough message if you have already been made redundant, but if you haven’t, then for God’s sake make a start in acquiring that capital!

The time to start thinking about your business is while you’re still employed

Another bugger for the newly redundant. And a bugger for the employed, who want to simply slump in front of the telly and decompress after work rather than research the means of securing your future. Repeat after me “the world does not owe me a living”. If you want it hard enough you will do it. If you don’t, you will have to face the consequences of your inaction, but you might get lucky and not get made redundant. It’s your call, just don’t whinge, OK? Your future is in your hands.

The time to start looking for a job is while you are still employed

The bad news just keeps a-coming! My hardest job search was the first one, after six months of unemployment. It is why I haven’t had a break throughout my working career since then apart from doing my MSc, even though I’ve had enough money to pay my way for the odd year off for a while. If you think the axe is coming your way, try to jump before you are pushed.

It’s not all about you

The world is a cold and heartless place. It really doesn’t give a s**t about the fact that you’ll be out of a home or you will never realise the dream of owning a big motorbike if you don’t have a job. Getting bitter and twisted about it won’t help you at all – indeed people seem to have a sixth sense about that sort of sourpuss attitude and avoid people with it.

Business Cases are fiction

After I’d established my firm and run a course or so I figured I really ought to get some business help and went on a course run by what is now Business Link. They were really big on setting up a business case. It’s bull IMHO. You simply can’t grade all the risks and costs with any confidence as to accuracy. You can usually qualify costs, but sales and risks? If you knew the answer to how much you can sell with any accuracy it would be because you were already in business selling it!

So you can dream up a theoretical profit and loss account down to the last penny, but it’s a fiction. You never really know, and if you are any good you gotta go with your gut, after you have tried to know the things that are knowable. Donald Rumsfeld summed it up pretty well in his succinct treatise on epistemology

There are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.

It’s the ones that you don’t know you don’t know which are going to bust your tail – or make you rich as a king. Warren Buffet’s Berkshire Hathaway was a textile company when he bought it in 1962, not an investment firm. He didn’t know what he didn’t know. And these unknown unknowns are going to scramble your business plans from the day you start operating.

I bootstrapped my company (used profits from the sales to expand, without taking on debt). You can do that if you have capital, but most people borrow money. To borrow money you will need a business plan. Just don’t start believing your own hype – empires start to fall that way. Keep a watch for the course you are following, and keep it on track or adapt as you go along.

Market Research is overrated

One of the things that Business Link will tell you is to do market research. That’s rubbish for a start-up IMO, because you need money to do market research, and because people lie if you do it yourself on the cheap, particularly if you are an eager wannabe and ask someone if they would use your product/service. They lie because they don’t want to prick your bubble – well a significant enough proportion of them lie. Knowing you don’t know is a lot better than believing you do know when you don’t, a nuance Rummy didn’t pick up.

When somebody newly redundant talks to me in a pub about this great new idea they have in general I mutter positive noises because it’s a bit rude to gratuitously p**s on people’s fireworks and kick ‘em while they’re down.That’s why there was the warning at the top of this piece so people who are looking for a pick-me-up booster don’t take this straight between the eyes. However, sometimes it is hard to keep the thread running in the back of my mind “That will never work” from breaking out ;)

You can design your market research to avoid that sort of behaviour, but as a startup you can’t afford the price of that sort of rigour. Market research is done by salarymen working for a company when they want to test out a product that people can understand. It’s still not infallible – Coca Cola spent shedloads of money market testing New Coke on 200,000 people and still fouled up bigtime. If your product or service is truly new, then market research doesn’t work. Who knew they needed a fax machine, or electricity, or Angry Birds before they had experienced what it could do for them?

The world doesn’t need an army of consultants doing what you were doing before

If you really were a diversity outreach coordinator or similar, then there unfortunately is not such a demand for this job that people will beat a path to your door. Many of these jobs were created over the last 10 years to hide the fact that there is not enough work at a middle class/knowledge worker level for the number of people that aspire to that. During the same decade communications have improved and an army of bright young chaps who speak English has burst into the global workforce.

Some of these newly created jobs made some aspects of the world a slightly better place for the disadvantaged, Unfortunately, Britian is about to become a much harsher and nasty place for everybody, and we can’t afford some of these niceties. So if you are after gainful employment, what I am saying is you might want to be looking at something different, and perhaps more useful to some non-disadvantaged section of society that has money?

Doubts about working with or selling to someone? Go with your gut

Some people are trouble. They may just not be compatible with you, or they may be genuinely dodgy. Life is too short to work with people that give you a knot in your stomach. Don’t be all bleeding heart liberal “everybody can be redeemed” about it. Just. Say. No.

On a related note, anybody who screws you over once will be back for more. If you observed them screwing someone else over consider you may be the next victim. The vast majority of people you deal with will be ruthless but straight up, which is fair enough, this is business, not charity. But those who act underhand should be avoided. It’s not politically correct but those who cheat you can never be reformed. Don’t even try. I lost too much money before this got through my thick head.

Sadly the go with your gut doesn’t work on the who to work with side of things, though it’s a good first start…

The British consumer is on the ropes and has no money

So don’t set up in business trying to sell modest luxuries to them. Either go hell for leather and aim for the really rich consumer, think luxury brands, or go for basics if you can sell them cheaper, or go for the business to business market – those companies still operating seem to be sitting on a fair amount of money. Whereas the UK consumer is feeling skint, and is about to be getting more skint for the foreseeable future as the repo-man asset strips the UK economy.  Always follow the money…

Know Thyself

I am not a natural entrepreneur. I’ve seen enoughreal entrepreneurs up close and personal to know that. I hate selling with a vengeance. Having tried, and again having seen others selling, both at work and outisde work, I know it’s not for me. I am an engineer, not a people person, though I don’t have the gauche crassness that many engineers have with people. Obviously if you have just been made redundant and are reading this far you might take issue with that assertion, but I did try and warn you up top. Many natural engineers verge on the borderline autistic and would come up with “well, it’s how it is, why are people getting upset?”

On the other hand, I can in some circumstances take people with me. I can stand up in front of 200 people and try and put a point across. I can talk to a customer and find out why they want to do something in a particularly expensive way and see if we can find a way that works for them and works for me/my company. I can sometimes see the view from 30,000 feet and observe a long-range hazard or unsustainability with enough distance to be able to change tack or minimise the effects. I am not a natural optimist but I’m not a doomer either (yeah, I know, you wouldn’t have thought it from this blog but then on the Internet nobody knows you are a dog ;) )

That kind of insight comes from introspection and reflection. It is likely to be error-prone, no entity can encompass itself, but it leaves me with at least some awareness of my strengths and weaknesses. That way I can play to my strengths and/or team up with people that complement my strengths and weaknesses.

It would seem logical, if you are about to take on risky enterprise like starting a business, to have at least some idea of what you’re good at and what you aren’t. It would be a bit crazy for me to become a travelling salesman. I could and have headed up a company but I am overly conservative and risk-averse for it to fly, I would be far better suited to be the wind beneath the wings of someone more entrepreneurial.

So know thyself. It was good enough for Socrates, and it will help you play to your strengths.

Still want to start up in business?

Take a look at this article on how great entrepreneurs think.The essential characteristics seem to be under the heading Do the Doable, then push it-

Sarasvathy likes to compare expert entrepreneurs to Iron Chefs: at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest. Corporate leaders, by contrast, decide they are going to make Swedish meatballs. They then proceed to shop, measure, mix, and cook Swedish meatballs in the most efficient, cost-effective manner possible.

That is not to say entrepreneurs don’t have goals, only that those goals are broad and—like luggage—may shift during flight. Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle Sarasvathy calls affordable loss. Repeatedly, the entrepreneurs in her study expressed impatience with anything that smacked of extensive planning, particularly traditional market research.

If you’ve been working for the public sector for years then you will probably be thinking more like a corporate leader than an entrepreneur. That’s great if you’ve got the resources of a corporation behind you. If you’ve been made redundant you haven’t got that, so you need to get yourself into entrepreneur mode to be able to run with what you’ve got.

I couldn’t do that, which is why I stayed in my job and walked away from the path of the entrepreneur. It was right for me – but then I didn’t need to make it work, whereas if your main income is from being self-employed you need to make it work.

And finally…

I’m not a headbanging wingnut that despises the entire public sector, there are many jobs that do need doing, including middle-class managerial level ones. I believe that contracts should be honoured, including pension commitments. Legalistic machinations like the RPI/CPI switch are despicable IMO – these are British citizens who took the commitments in good faith. Like any enterprise, the State has the right to change its mind in what jobs they get rid of or retain, but it should honour its existing commitments, and take responsibility for its actions. If previous administrations need to be charged with maladministration that should be done in a measured and open way. The State is also entitled to change its mind in how it remunerates these positions in future, again like any private company. That, unfortunately, means pension accrual in future – a pension is deferred pay, and it can be changed. It happened to me in the private sector.

However, this post was inspired by coming across one too many examples of a redundant public sector worker who also suffered from a shocking sense of entitlement and the feeling that life wasn’t fair. Life isn’t fair, it was my mother who informed me of that, and to be honest I would have read the writing on the wall as soon as the Tories became part of the government. That means that this fellow has had nearly a year to take action, but failed, and this seems a common theme in the public sector.

That passivity is like a rabbit frozen in oncoming headlights, and that rarely ends well for the rabbit. I can testify that you can do something – if you start before you get your P45. I started in April 2009 when I experienced an outrageously incompetent piece of line management in the teeth of a company crisis and realised that I did not want to be owned by anyone. I wrote this as my first post one year into the plan (the preceding High Water @ Woodbridge was to test the software).

I am two years in. You can see how I responded in my net worth graph(square blocks)

An Ermine's net worth

The debts are the tail end of me grounding my mortgage; I don’t consider the value of my house to be part of my net worth. The rise starts as soon as I identified something has to change in April 2009, and is now well above my annual gross salary, thanks to the tax-free status of AVC savings along with full ISA contributions across 2½ years. The dips are not holidays or consumer thneeds, they are purchases of business equipment, which I also don’t consider as part of my net worth. The rising debts at the end are a credit card stooze, the funds of which are in the care of the Nationwide Building Society at the moment.

There’s a moral to this story – raise your eyes to the distant horizon, and if you see storm clouds gathering there then roll up your sleeves and do something. The way to avoid a crash is to take corrective action before you are ploughed into the back of the car in front!

There’s nothing that special about me, I am an ordinary guy doing a regular job. If I can do this then you can too, if you are one of these middle class public sector workers. You should be one year into your financial defence plan by the 6th May, but starting now isn’t so bad…

 

Civilisation – The West and the Rest, Protestant Work Ethic Redux

Earlier this year here at the Ermine’s Nest we pondered whether there was a case to be made for saving £140 odd by outing the TV. That may seem obscure to non-UK viewers, but in the UK there is a thing called a TV licence that you are meant to have if you watch TV as it is broadcast. This largely pays for the BBC, whose programmes don’t have commercial advertising.

Anyway, we decided that we would see if we could find something that pleased us enough to justify the £140, so I occasionally look for stuff that may interest me.  The recent Panorama Finished at Fifty was one of these, and I had recorded Niall Ferguson’s Civilization -The West and the Rest. This was presumably a TV series of the book

Watching this was rewarding and I learned a few bits and pieces I hadn’t known before. Niall comes across as a dapper and personable enough chap, and according to this review in the Grauniad he targeted this series at teenagers.  Which explained why he had this infuriating catchline where he comes across as “Dad trying to be down with the yoof-speak and with it”, by endlessly referring to the six “killer apps” of Western Civilisation. I know he titled his book civilization but I just can’t bring myself to spell it that way, I have enough unwitting typos without adding deliberate ones ;)

Anyhow, that killer apps yoof-speak got on my nerves, because nothing made by the Apple corporation has darkened my door because I don’t have money to burn, and I am a crabby old git who has nothing to do with media and so I don’t refer to apps and folders on a computer but directories and programs. When I see job ads for appers rather than programmers I’ll rethink that.

Despite the killer app-speak, Niall was informative and reasonably to the point, though his perspective is a lot more upbeat about the advantages of the European empires than I am used to. Some people will hate it for that alone. He did at least tip his hat to Mahatma Gandhi’s delightful one-liner on what he thought about Western Civilisation, something to the effect of “yes, that would be a good thing”.

One takeaway I got from the series, particularly in the last program, was the effect of  the Protestant work ethic on the success of the West in economic terms. I’ve spent my fair share on here slagging off the Protestant work ethic, but Niall did make me think that perhaps I should be more nuanced about it.

When I was in America, it did strike me that there were an awful lot of churches about, both in New England and in California (I haven’t been anywhere else in the US, other than NJ, NV, MI, CO and AZ so it may be very different elsewhere). The sheer density of churches was remarkable. Niall made the case that this has something to  do with the dynamism of the US economy compared to those of Western Europe, a part of the West he considers in relative decline vis a vis the US, as it became largely secular after the Second World War.

It puzzled me because the presentation of Christianity in the US came across to me as extremely in-your-face, of a type which I believe is called evangelical. The last time I had significant dealings with Christianity was in the 1970s, and this sort of thing wasn’t around then.

In Niall’s program they showed some clips of what went on in US churches, and what strikes me is that the entire message seems to be mediated through the emotional centres, with rah-rah sessions of  ‘Can you FEEL the power of the Lord’ together with the raising of arms and clapping. The sort of thinking and reflection that I had observed in Christians in the Old World, albeit three decades ago just wasn’t there.

That sort of thing makes me uneasy – somewhere at the back of my mind I feel that if the Good Lord is worth believing in, He wouldn’t demand that His adherents check their brains in at the door. Each to their own, but I could see how this might lead to people being persuaded to defer gratification for other goals. And a lot of economic success seems to be about deferred gratification, so Niall makes the case that Protestant Christianity was a large part of the economic success of the West. In his final program he makes the case that as this fades, so the power of the West will also fade, particularly as it appears that Christianity is on the rise in China.

Now this is a TV program, and though Niall is bright he isn’t infallible. For instance he perpetrated a howler in saying Edison was associated with AC power in the US – he opposed it intensely in the war of the currents due to patent considerations.

I have no way of verifying a lot of what he claimed. I would agree with him that there is a decadence and a lack of people taking responsibility for the consequences of their actions in the West nowadays. There is a general infantilisation of public discourse, where we all too often resort to “the Government should” or “They should” fix one of the current malaises, often the result of earlier aberrant behaviour. For instance the years 2000-2007 where we all believed house prices would go up forever so it was worth lending NINJA‘s money in the knowledge the rising house price would enable them to pay off the loan?

It is also possible that the increasing secularisation means that one common source of a moral compass is lost, and this is why we are regressing and becoming decadent. It isn’t the only explanation, and humanists among others would object to the concept that only religion can provide a moral frame of reference. An alternative explanation would be that life has got materially easier, so we can get away with more lax behaviour. Or I might just be getting older and it’s all really okay as it is, despite the financial crises and the disappearing jobs that the POTUS noted a while back ;)

So all in all I can probably get my £140 worth, over the year. This programme was not on the BBC, so it was infested with ads. However, my Humax Foxsat PVR seems to be programmed well inasmuch as two taps of the >> button skips the whole ad break, so I am not troubled by companies trying to push consumerism on me. I  win much of the simple living/frugality battle by busting as much advertising and junk out of my sight as I can .

This also helps me in the fight against my power bill as it has a standby power usage of < 1W. Obviously that’s still more than if I got rid of the whole TV receiving system, however it is very low, so I can live with the £2 it costs me in power a year, as it spends most of its time in standby.

Listening to the barley bird – one of the pros of cycling to work in a beautiful county

One of the downsides of being a crabby old git on here is I don’t tip my hat often enough to some of the finer sides of life. A year ago I posted about the advantages of cycling to work with the emphasis on it saving money. However, there are other pluses to cycling to work, my route goes next to fields and then across a small patch of heathland, where I was treated to this lovely sound

:http://simple-living-in-suffolk.co.uk/wp-content/uploads/2011/04/20110419_101131_nightingale_240hpf.mp3|titles=Suffolk

It’s the sound of the barley bird. You have to have a heart of stone if you can’t tale a few minutes to listen to a nightingale that has crossed the lonely thousands of miles from Africa. He sits deep in a bush or some scrub and calls out his signal, which he hopes is heard by a lady nightingale who follows his long journey a couple of weeks later. That’s just not the sort of thing that you hear from your car over the traffic over the Today programme. Called the barley bird in old Suffolk because nightingales arrived as the barley was sprouting, according to the wonderful nature writer Richard Mabey

2011 petrol prices
Bike odometer

Bike odometer

As for the financial advantages, well, that still holds – I pass the same petrol station and it looks like things have gone up somewhat – petrol was £1.20 a litre then. So I get to save about two pounds a day. Okay, so it isn’t earth shattering, however it adds up. In the time I’ve had this bike computer I have put about 3000 miles on it. I’m a utility cyclist not a recreational one, so most of these miles I’d have driven otherwise.

And every so often I get to hear a nightingale. What’s not to like :)

 

 

 

 

No more Interest-Only Mortgages from the Halifax

Every so often you come across an amazing piece of news, something that makes you wonder if people have been asleep at the switch for the last few years. Let’s hear it for the good people at Halifax, who have just woken up and decided that perhaps they would like to have some documentary evidence of people being able to pay back the money they lend to them, as opposed to just being able to pay the interest.

Uh? What part of liar loans did they not get at Halifax? Let’s hear some of the excuses for interest only loans from Melanie Bien, representing some bunch of charlatans delivering empty promises mortgage brokers:

“High-street lenders have been tightening their interest-only criteria since the downturn because they regard these loans as more risky than repayment deals. If this continues, interest-only mortgages could vanish, or become so limited in scope that they are available to only a handful of borrowers.

Interest-only loans aren’t inherently bad. What about first-time buyers who don’t have a repayment vehicle but are due an inheritance? Or someone with a modest income but sizeable and regular bonuses which can comfortably be used to clear the capital?

‘One size fits all’ does not work when it comes to mortgages. For some borrowers, not all, interest only is the right choice.”

Melanie, my dear, I don’t know if you really were born yesterday or you are thinking of your commission, but you are wrong. The tragedy is that if a borrower needs an interest only loan to be able to afford it, then an interest-only loan is inherently bad for that customer. That is because it is allowing them to live beyond their means, and they are also driving up house prices in general with the other people living beyond their means, achieving a drive-by shooting of many people’s personal finances.

There are some people that know how to use interest only mortgages. They are few and far between, and will have uncommon characteristics, like having large share portfolios and accumulated capital wealth. The sort of punter that needs Melanie’s services is not one of them, so when she says “you can afford this house if you start with an interest-only mortgage” she is always wrong.

There’s no money in it for her to say “you can’t afford that much” but the rule is simple. If you have to ask whether you can afford it, and the answer is “yes, if you go interest-only” then simply replace that statement with “Do you feel lucky, punk? Well, do you?”

Buying a house is a big commitment. It’s hard enough to rely on having a job for 25 years. If you are relying on a bonus regularly then you are playing Russian Roulette with your finances. The whole point about a bonus is that it’s a bonus, so it can’t be relied upon…

It’s really staggering that it has taken getting on for three-and-a-half years for the Halifax to realise that interest-only mortgagees aren’t so much high-risk as they are bad risk.

Let’s face it, if you really want an interest-only mortgage, it’s hardly as if the Halifax are really raising the bar that much. Tell them you will pay off the loan with an ISA, and have the presence of mind to be able to produce evidence of having had that ISA. You can always cash it in after you have secured the loan if you really want to rent your house from the mortgage company. The new rule isn’t so much documentary evidence of having a strategy to repay the capital, more documentary evidence of having had savings for a year. If you really can’t drum up the savings then borrow the money from a credit card and put it in an ISA. You would be absolutely dead-certain certifiably mad to do that, but it would probably work.*

*please, please don’t do this. Halifax may check your total credit score and see the card loan, your ISA may fall in value by the time you want to cash it in to repay the loan, there’s just so much that could go wrong. If it still looks like a good idea, back away slowly from your computer, and seek independent financial advice as soon as possible. Oh and you probably can’t afford the house, BTW…

19 Apr 2011, 12:57am
personal finance
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3 comments

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  • New ISA year musings

    So it’s been a new ISA year, about 10k to put in, possibly 17k if I can save that much and still avoid paying 40% tax via AVCs. In theory I should be able to do it.

    I want income, which tends to mean going for steady, boring companies that make stuff that it’s hard to do without. I generally look for something that pays a dividend yield of 4.5 to 6%, and hasn’t had any dividend scares in the last few years. The latter requirement is a big ask in this post credit-crunch world.

    I try not to do PEs of more than 15 (that is the long term average for the FTSE 100 ISTR).

    I want to buy and then hold – if the income remains at about 5% of what I paid for the holding I am happy, though of course I hope over the long term for the share price and dividend to slowly drift up broadly in line with inflation, otherwise I might as well buy bonds.

    And hopefully the volatility of the dividends, when averaged across my entire holdings, will be less than the volatility of the share prices. For holdings that meet these requirements, I aim to purchase in lumps of about £3k, preferably using iii’s £1.50 lumped dealing service. That keeps costs manageable and I don’t end up with more than about three of four stocks to know over a year.

    For any major asset class if I can I would like to have at least two typical companies in the field. That is why I have GSK and AZN for my pharma holding, for instance. If I had oil I would have BP and RDSA.

    The income seeking puts me in the territory of elephants. These suckers aren’t going to gallop, I am not going to wake up one day to see a share price five times higher than it was the night before. Sadly there is some risk I’ll see the converse at some time, though even BP in its annus horibilis didn’t take that sort of hit. I am comfortable with that – I am not a young pup at the start of my career trying to build my pension taking risks everywhere to try and make the annual savings lower. And I will need the income soon – within two years.

    Using PE is very old-skool compared to using PEGs and CAPE and the sort of stuff described here which sounds like it should be a lot more ‘real’ – but having read the page twice I can’t understand it. I recognise some similarities with this approach which I can sort of understand. My shares universe is small, limited by my requirements and so I accept the imprecision of my tools, as long as I generally get results that work for me in terms of steady dividends of about 5% of my original stake then fine.

    I would far prefer to use use investment trusts for income, particularly as I could use the smoothing where I am particularly exposed in trying to live off my investment income in the two to five-year time-frame. But I don’t buy those at a premium and unfortunately that seems to be the way things are for the equity income trusts I am interested in, Mr Market is in an overly bombastic mood on that front. I hate doing the grunt level work of dealing with individual holdings, but needs must at the moment.

    In doing this, I am making an implicit bet that the financial system can preserve wealth across the years. My worldview is such that I think there is a serious risk of that assumption failing dismally. That is why I have non-financial investments. I therefore accept that there is a small but finite risk of my entire financial holdings being destroyed if the financial system is overwhelmed by a black swan event. More likely, it will be overwhelmed by the terminal challenge to the fundamental axiom of capitalism – the need for continuous growth. That challenge will come as oil becomes more expensive year on year as it becomes harder to extract. Yes, we may head it off with thorium reactors or solar PV. Well, maybe not the latter, solar PV in Britain? You must be joking, and David McKay says it can’t be done.

    So, how should I play this? Well, I have bought some shares for about 3k from this year’s ISA. The rest I will hold as cash for a little while, as I am hoping for some buying opportunities when:

    • Greece finally takes that razor to the bond markets and reinstates the drachma.
    • Ireland at least restructures the debt, though the days of the punt must have some fond memories in Dublin.
    • The Portugese escudo returns

    I figure 2011, probably the second half, holds a good opportunity for this, wich should hammer share prices.

    Then, of course, there’s the Big One. If that blows, it could shatter the financial system, but if it holds then the levels of fear and loathing stalking the Western world will be truly awesome to behold. We won’t be able to tell night from day, or who or what to trust to store value.

    That Big One is the dollar’s reserve currency status being revoked or usurped. The world was dumped on from a great height when John Maynard Keynes’ Bancor was switched for the US dollar at Bretton Woods.

    If that happens all bets are off. I don’t know if any currency will hold value, or if when the kingpin is pulled out the whole system will fall apart, the falcon will hear the falconer no more and the numbers will drop from my dealing screen like the opening credits of The Matrix. OTOH there may be money to be made in the confusion, as well as a good deal to be lost.

    Sooner of later the world will wake up and realise that the conflicts inherent in having a national currency as a reserve currency are toxic, to both the nation and to the world. It is moral hazard writ large, an invitation to run a continual deficit at the expense of everyone else.

    However, to start off with, a jolly good Euro crisis should be more than good enough to paste the stock market and improve values!

    PS Since writing this it seems an update to Monevator’s HYP is on it’s way. Which hopefully will inform my thinking on this. I hadn’t expected to have to use individual shares in a HYP, as I had anticipated using income investment trusts. Unfortunately they are poor value at the moment because they are trading at a premium, presumably because everyone else is chasing investment income at the moment because of the atrocious return on cash.

    What is your number? How much do you need to live on?

    I swiped some of the title from this thread on Money Saving Expert, which is about how much you need to live on in retirement. Don’t start reading the thread from the beginning, because there is a lot of bad humour and flame wars to start off with. The link I’ve posted gets you past the worst of that, and all credit to the OP for persevering in the face of adversity!

    It was an interesting tale, as it was the estimation from a whole bunch of real people independently trying to estimate how much a couple would need to live on in retirement. Clearly there will be a range of responses, but there was a surprising commonality eventually settling on around £27,500

    The £27,500 can be broken down into:
    Food £6,000
    Car/Transport £5,000
    Bills/Utilities £5,000
    Holidays/Leisure £6,000
    Clothing/Cash/Other £3,000
    Repairs/replacements £2,500

    This figure is predicated on a owner-occupier couple who have paid off their mortgage and have no dependents living with them. This figure is roughly corroborated by real retirees living off a similar amount; in practice real retirees seem to be able to shave a little bit off their estimates.

    Although hard to express analytically, I get the feeling that those posters who have had children (ie those mentioning DD, DS in MSE-speak) are at the lower end of the Number targets, the child-free at the other end. No huge surprise there, I suppose ;)

    Something that surprises me is that for a single person the costs are only a little bit less, there seem to be significant economies of scale for couples. I operated a household as a single person for over a decade early in my career, I wonder if perhaps this set me back more than the extra cost of having children, as when I compare myself with my colleagues they tend to live in slightly more fancy houses, although they are often still carrying a mortgage at the same age.

    Poster Loughton Monkey made the good point that you can overcook focusing on how much you need to retire. His alternative, which is closer to the ERE approach is to drive your running costs to below your income, which is broadly how I do it. I then save the excess. There is more drama in my approach, particularly now where I am saving > 70%, but LM has been more consisent throughout his working life. Slow and steady wins the race, fortunately I also have the benefit of a company pension scheme to keep me in the slow and steady for all the years where I didn’t save explicitly. In favour of my younger and more profligate self, I did pay down the mortgage ;)

    Loughton Monkey retired at 56, and he saved about 25% of his income. This roughly squares with ERE’s calculations when you add in the State pension later on  and he also seems to be saving more than he had originally anticipated. The trick to early retirement is living below your means. There isn’t any other way that doesn’t depend on scarce luck or criminality.

    Unfortunately for me, there are significant differences in my lifestyle which make me wonder whether either I am wrong or I may end up short of money or having to work a little bit longer. These differences are:

    Firstly, all these people are assuming that industrial society carries on in much the same way, so the past is a reasonable guide to the future. My view is darker, and therefore some of the assumptions about the world they live in are different for me. The MSE posters may be right, but I have to chart my path according to my own lights.

    To be honest, I am amazed at the implicit assumption that everything carries on as normal. The best I can imagine for the UK economy is that somehow Peak Oil and other resource crunches are shown to be a chimera, the result of more industrialising economies drawing on resources that have a limited rate of production instead of a Limits to Growth type of brick wall. Even then I still see many years of grinding decline deleveraging the stupendous UK debt overhang in government, in households and in companies. Alternatively we can deal with the results of defaulting – currency crisis, skyrocketing inflation and horrendous unemployment. In my view the PIIGS have already bought their tickets for this one-way ride out of the Euro, and Britain is only separated from that scenario by having a currency it can devalue.

    Yes, Monevator may have been right when he said Britain is booming again when viewed though the selective prism of the stock market. But it isn’t going to feel like that for the average punter on the street. It will take decades, if it ever happens, to pull out the survivors from the twisted wreckage of the British and Western economies, and all the time wealth will probably concentrate towards capital rather than labour.

    That means more jobs haemorrhaging away, more unemployment and a domestic economy stuck in low gear for years. The shattered education system of Britain which was the result of our failure to man up to the hard task of telling some children that they are less bright than others won’t help our economy in that case, and will take many years to repair with money we may not have. Hopefully most of the problem is in the perverse value systems that seem to have have confused equality of outcome for equality of opportunity.

    Another difference in my circumstances compared with the MSE folk is that I may start one project that may add more expense to my outgoings for a while, which again is different from the normal pattern of living.

    So I am a little bit off target. My outgoings are significantly lower than most of the posters, and my savings are probably higher than many. My “number” is about 18k, which given that I have a darker view of the future, possibly slightly greater outgoings than the typical retired couple shows that either I am wrong, or that I have no accurate way of evaluating my attempts to get myself less exposed to the money economy by saving energy and producing food.

    Loughton Monkey is probably the closest approximation to the trajectory I would like to take. He is older than me, and worked for 34 years. Although I have 31 years of NI contributions I don’t think I have worked for 31 years; I believe that when I went to university NI stamps were accrued though I wasn’t earning any significant amounts of money. If I retire in 2012 I will probably only have clocked up 30 years of working, so I am 10% short of his earning years.

    Something else that I learned in reading that thread is that I am lucky so far in terms of physical health for my age, I have no significant issues there, apart from the minor slights and injuries one accumulates through life. I have visited the doctor considerably less than once a year and aim to keep it that way. Part of retiring early is to to try and preserve that.

    I am entering a time of life when I lose some resilience physically, and looking at colleagues at work the stress of the workplace can cause some serious ill-health. I have been lucky there too, the way this has manifested for me is that it is easier to pull muscles for things that really shouldn’t be over-exertions and that the resultant aches take a long time to clear. It is observable that this is much more likely to happen when the working environment is being particularly bad, though since I am in an office job the exertion is always outside work. But it is a warning, and I only have to look around me to see that others have been less fortunate indeed. One guy, who was lived a healthy lifestyle and was into walking and hiking on his holidays with his wife was saving into AVCs like mad and hated the work environment. He looked a lot fitter than me, but he didn’t even get to see his 55th birthday…

    So it’s important to remember that quality of life isn’t all about lifestyle and it isn’t all about the number. I would rather run out of money than run out of health.

    The Quiet Man reckons we want to all work till we’re 70? Dream on…

    Iain Duncan-Smith has all the charisma of a dead fish, but he does come across as genuinely thoughtful, which is why he made such a poor candidate for leader of the opposition all those years ago. That thoughtfulness seems to have deserted him when he comes up with the assertion that “Most workers want to work on when they reach 65″

    Well, Iain me old chum, this worker has no desire to do that, and there’s not much call for it amongst my colleagues either :) I guess it all depends what IDS means by “want”, obviously if their personal finances mean that due to his raising of the State pension age they will be skint then people will want to work on, in the same way as if he points a gun at your head you are likely to “want” to do whatever the nice man says…

    Then of course what people want and what people can actually do are not always the same thing, and as Fiona Phillips is trailing in Finished at Fifty they may not get the opportunity. If you are one of the finished at fifty, this graph will show you why

    UK Population distribution by age

    Now look at the lump in this at 46 and add three years (because it was from 2009) and you can see that there are an awful lot of people in their 50s in the next decade. Now they will probably not all be dying off in the next decade, so they will still be there ;) An awful lot of these will be KO’d in the public sector cuts – of the expected 400,000 60% will be over 50, so about a quarter of a million over 50s will flood the workplace.

    So if you’re over 50, you need to look at this situation and start building some resilience into your personal finances, because realistically, if you lose or leave your job you aren’t going to be working for an employer again. Period.

    I had to have a laugh at the tosspot Digby Jones’ solutions:

    older workers are at real risk of being forced out of the workforce into an unwelcome – and under-funded – retirement before they are ready after enjoying a bountiful job market throughout their 30s and 40s.

    He said that while the economy continues to shed jobs at every age and level, he believes many older workers have become set in their ways and that could turn into a barrier to finding employment.

    “Have any of them thought of emigrating? What about being mobile within Britain?”

    He also said some need to think of retraining and volunteering as a way to keep in the habit of going to work. Perhaps more painfully, he said the idea of accepting substantial pay cuts cannot be ruled out.

    Digby, me old mate, you’re a bright chap so there’s much truth in what you say, but a lot of BS too. Let’s deal with the BS first – the reason these guys aren’t emigrating or moving around the UK is perhaps because they have children and family commitments ;)  You’re 55, Digby, perhaps the absence of any fruit of your loins means you miss that bit of the typical human life cycle, but I have enough feeling for my fellow-men that I can see it though I haven’t had kids! If you are going to emigrate or move around, do it in your 20s or early 30s, not in your 40s or 50s. Or do it in your 60s, when you’ve done with working for a living.

    On the other hand some of the other stuff he says has some point though. You get more cantankerous and intolerant of BS as you get older, partly because you’ve heard the same lies too many times before – hello “empowering employees”, “performance management”, “corporate social responsibility”, “this reorganisation is unlike the others that failed and will change everything”. And partly because you come to realise work isn’t all that. It pays the bills, it isn’t a reason for living. Repeat after me, Diggers, “people work to live, they do not live to work

    The increasingly rotten state of the workplace as digital Taylorism expunges most of the joy in doing a good job takes its toll, in some ways having started work where this was not so prevalent makes me kick against the increasing systematisation and deskilling of the workplace more because I know what has been lost, whereas someone starting now at least doesn’t have the reference point.

    Perhaps ’twas ever thus. President Obama called out this rotting of the modern workplace independently of me. He’s 49 so perhaps he is one of these crabby old gits too ;)

    “some need to think of retraining and volunteering as a way to keep in the habit of going to work” Digby, you show your evil Calvinist heart of darkness there. How about the alternative, get a hold of your personal finances, save, retire early and enjoy life out of the rat race?

    What the hell is the point of keeping in the habit of going to work when you ain’t going to get any? By the time you are 50, the sands of time are running out, and you don’t want to waste those grains on empty promises. There will never be full employment again in Britain while globalisation and industrial capitalism holds sway.

    Digby, you may well be part of the solution but your sort and the CBI are a huge part of the problem too.  You have been busy automating and deskilling and downsizing and outsourcing. No one of those things is necessarily wrong in any given situation but it all adds up the the great sucking force of British jobs as capital accretes power and seeks to maximise its return. Yes, it’s what I am also trying to do with my share portfolio but I don’t stand up and claim that I am trying to improve the British employment scene, or spout garbage to try and offer solutions in places they aren’t to be found.

    In your late 40’s or 50’s? Batten down those hatches, nobody else is going to look after you

    If you are in your late forties or fifties and in employment, then you are in danger territory. Your best hope of a solution to being downsized or made redundant isn’t to find another job at a similar salary. It is to rightsize your life and downsize your financial commitments. Live smaller, cut the foreign holidays and Jemima’s ballet lessons. She’ll prefer it if you’re able to carry on paying the mortgage after you get the push.

    Your job as the head(s) of your household is to keep a roof over your family’s head and bread on their plate, and people like Digby Jones and his CBI chums are busy trying to eliminate your job if you work in the private sector. If you work in the public sector then you already know that the Coalition is trying to destroy your job to save money. Volunteering isn’t the solution, rightsizing your financial commitments and maximising your savings is.

    Hark, listen out to that distant ringing over-50s, and send not to know for whom the bell tolls. It tolls for thee, so cut the needless expenses from your life and buy yourself some freedom. Don’t be a chump and just because you may be sitting pretty at the moment like Lord Young said, don’t ignore the precariousness of your financial situation.

    Iain Duncan Smith is the harbinger of doom. He’s telling you what is going to happen to you if you don’t take corrective action. Your job is show him where to stick it ;) Unless, of course, you agree with him, and do want to carry on working till you’re 70, but even then don’t necessarily think of earning your current salary…

    Why I don’t want to work till I’m 70

    The original case for retirement was that people were in manual jobs and were physically worn out by 65. Digby Jones reckons people ossify and fail to adapt to change as they get older. I’m not sure either apply to me.

    I was into engineering as a kid – it was a world where science and technology were changing things rapidly, I was in primary school when they landed men on the Moon. I loved it, and did well enough at school and university, I wanted to work in a electronics design/research facility. Britain still had those everywhere then. I worked for a small company, then the BBC and then moved to my current company.

    The structure of the big companies was great for a young tyke learning – there were guys who were fantastic experts in their field and if there were issues you could tap these guys up. In my early to mid days of working, companies had teams of expertise in different areas, at the BBC there was audio, RF and video expertise in designs and it was fascinating and exciting to learn and improve the art, from the design folk all the way to craft skills like the guys who wired things with a precision and elegance that I can’t even match today. And a hat tip to my current company, which had world-leading experts from whom I also learned, and a graceful working structure where expertise was acknowledged and the young pups were nurtured.

    I still love engineering, though in the passage up the greasy pole I inevitably do less of it, but I have retained a far more hands on and specialised presence, because I didn’t race up that pole, so I didn’t go say the project management route.

    So on that basis I’m with IDS – it is something I love, I can’t imagine not looking for better ways of doing things just because the day comes that I reach my 65th (or 70th) birthday. So why the hell do I want to finish off in my early 50s?

    It is because I have seen a toxic and evil cancer seeping through the structure of my company, the foul stench of Digital Taylorism. The previous world of divisions aligned by expertise was stable enough that you could build skills and a reputation. Engineers never make great line managers but they do admire competence, and so it was possible to advance and do more challenging work.

    Some of this changed with digitisation of audio and video, but that opened up new areas one could hone one’s craft, and there was the whole world of software to go into. But management of people began to change, with the emphasis on interchangeable skills, treating people as tools in a toolbox, anonymous numbering by ‘skill sets’. There were even three, yes, count ‘em, three attempts over ten years to have a skills database so that work would come in and the database could tell you who was due to become available wheen, the emphasis began to shift to accredited skills and tosh like that. Before, the group/divisional head would know who was good at what, and allocate work accordingly, of course always balancing the usual issues of too much work and not enough people. It was a human sized operation and it worked well, but the shift to ‘resource allocation’ on workpackages broke the whole system, and there were a couple of insane attempts to separate line management from job management. This totally changed the working environment.

    The last straw was the perversion called performance management – where you have to fill in a form claiming evidence of particular characteristics. How I yearn for the old ways where my work stood for my competence. As Matthew Crawford said in Why Office Work Is Bad For You, you can tell a good carpenter by the way his doors move smoothly and are set well in the doorway. A good electrician’s lights come on when you throw the switch and aren’t accompanied by a shower of sparks.

    My work can speak for itself, by the time you are in the last decade of your working life you have got enough competence to know what you’re about. But because the line management structure has been smashed I was line managed previously by a twit who had no idea of what I did. He was a box-ticker and wanted me to fill in boxes with competencies and rubbish like that.

    I have no respect for that sort of way of carrying on, and in the search to automate and systematize and outsource all integrity has been lost – I have occasionally had to pound on desks and raise a stink to stop things happening that for engineering reasons simply will not work. And I’m sick of it, I’m sick of the stress, I’m sick of the lack of reward, I’m sick of the pettifogging paperwork, I’m sick of the stupid attempts to get databases to do things that people should be doing, and above all I am sick to the back teeth of all the jobbing caretakers that infest the management of large organisations now, who know the price of every function and the value of none of them.

    To those that say I should move, why the hell should I? I like living here, I don’t want to drive miles every day in a world of increasing oil prices, and anyway, the cancer of management consultancy reeks across the land. Rather than having the balls to stand or fall by their own skill and experience the overpaid caretakers that are senior management in companies today pay McKinsey et al to do their work for them while drawing their bloated pay packets for parroting what they are told, rather than rolling their sleeves up and trying to understand the companies they manage.

    These CEOs have hardly got time – their tenure is only three or five years. What a rotten way to run a company. Why do they get away with it? Because of scale – once it gets enough capital behind it a company can make things happen and pay for favours that make life easier for it, particularly in a globalised world. You don’t need to excel in skill or knowledge, you just need clout. Microsoft aren’t widely used because they’re the best, they are widely used because they are the biggest.

    And that, Iain Duncan Smith, is why I don’t want to work till I am 70. I am not going to hang up my tools and my boots, but I want out of the rat race.

    temperature controlled heat mat success

    The heat mat I fixed three days ago has delivered ;) We’ve had lettuce seeds in a cold frame from two weeks to no joy so far, whereas a new batch with heat @ 20°C looks like a win in three days.

    lettuce seedlings germinated in three days @ 20C

    Now I just need to get a control on the Sankey propagator which uses four times as much power for an area about one-sixth of the size. For all that power it does raise the temperature to over 30°C which is unnecessary, and possibly slightly detrimental.

    Cash ISAs outnumber Shares ISAs by four to one – Why?

    According to the Torygraph, Cash ISAs are four times as common as stocks and shares ISAs. It begs the question, why? Particularly now, when you sweat buckets to try and match RPI, you end up having to lock the cash away for ages in an environment where interest rates will probably have to go up, why do people put up with the pain?

    Okay, so I hold one, because in the dying days of FY 2008/09 I came to the conclusion that I may soon not be working due to ugly events at work, and needed to start saving as much as possible against that possibility. I didn’t have much time to think, so I shoveled that year’s savings into a Cash ISA and topped it up a month later in April 09. Then started on a shares ISA – I had liquidated my entire shares ISA holdings in 2007 due to a life changing event, fortunately before the credit crunch ;)

    Until 2007, I’ve only even held shares ISAs, initially when they first came out a Virgin FTSE tracker which was one of the few CAT qualifying ISAs for less than outrageous charges. They got poorer value as time went on, and the FTSE100 tanked over the next 7 years anyway.

    I also had a Schwab self-select ISA in the dot-com boom and bust to teach myself the hard way why you shouldn’t churn your portfolio. That got sold to Barclays, who, cheeky pups, began to levy charges just to hold the damn thing so they got kicked into touch in favour of iii. My current shares ISA is the first time I’ve got ahead of the game, amazing what a an older and perhaps clearer head does for you, some quality education from Monevator plus sitting on your hands and not churning the damn thing does. That old boy Warren Buffett has a point – if you’re going to buy then buy as if you will hold for ever.

    However, I would assert that a Cash ISA has no reason to exist in todays UK financial landscape. It stands charged with several deficiencies:

    • Nowadays it loses against RPI, which is the only real measure on inflation IMO
    • It reduces the amount you can put in a shares ISA that year
    • It comes with strings attached like long lock-in periods if you want a half decent rate
    • You can put a maximum of £5340 into one per year

    Compare that with the alternative, National Savings Index-linked savings certificates. Okay, so they aren’t actually available at the moment, but are expected to be soon, and if they aren’t you can still open a Cash ISA sometime next year. They have the advantage of

    • matching inflation if held to maturity (3 or 5 years)
    • relatively immune to bank failures :)
    • a maximum investment of £30k per issue (in practice about the same as Cash ISA limits with the issue durations but you can front load the purchase as opposed to dripping in year on year with Cash ISAs, should you have a large lump sum to invest)
    • Tax free interest
    • you can get your stake back at any time, though with loss of the last year’s interest.

    What the heck is not to like? What is the point of a Cash ISA these days, and why aren’t they forced to raise their game with the existence of such awesome competition?

     

     
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