Friday, September 09, 2005

DWD

I thought I would write a bit of a different blog today and bore you all with my finances. Its basically how I DWD (dealt/dealing with debt), for the last year or so I have been doing my best to try and get out of debt, I would like to now write a bit of a statement of affairs.
Looking back to this time last year, I owed close to £2700 on my Credit card, about £1000 in an overdraft and I had just purchased an Apple Powerbook using a line of credit from the Apple store. Add to this my about 12,000 of student loan (though that's handled differently so Ill discount that for the moment).

Ouch how did I get here?

Whilst at uni I was bad with money despite getting some money off my parents and having a part time job at the council and doing a years paid work for Wilmslow High School I graduated with an overdraft and a big student loan. Then I decided to go to Australia for three months it was the trip of lifetime (see some of the pictures here) I had savings of £4000 up to that point on the trip I basically spent all of this and then some whoops.
To make matters worse I found it difficult to get a job on returning spending nearly 4 months on jobseekers allowance and still using my credit card double oops.
What was worse once I started earning a wage rather than pay off my debts I borrowed more.

So what is the big deal?

"the borrower becomes the lender's slave."
-Solomon in Proverbs 22:7

Well in a way the wasn't one, I could have taken a loan consolidated my debts and worried about it tomorrow. The only thing is I started to think how much money the banks were making out of me, it might only be costing a few pounds a week but it all starts to add up and I started to think maybe I should keep some of this money for myself. I also read a number of books thanks to Nicks badgering "The Richest Man in Babylon" and "Rich Dad Poor Dad" and they really showed me that I didn't want to be a slave to debt.

So where am I today?

Credit Cards

Well thanks to using a series of 0% interest credit cards my current credit card balance is £257 and over the last few months I have switched to a cashback card use my credit card to earn cashback and pay the balance each month earning me money in two ways firstly I get to leave my money in the bank for longer earning interest and secondly for each purchase I earn 0.5% cashback.

Student Loan

A funny debt really its the usual government mess of means testing and brocracy. I currently pay about £50 a month (used to be 80-100 before the government change the threshled). I could start to make overpayments be what would be the point? Interest on student loans is pegged to inflation, so I would make more money be saving any overpayments in a deposit account. Also payments out of my wage are taken before tax any extra payment would be made after tax.

Overdraft

My overdraft level is down to £450 well inside my £500 graduate account' interest free allowance.

Savings

Well pretty much for the first time in my life I have a reasonable amount of savings building up. I set up a number of direct debits to make regular payments into my savings accounts the day after payday, I found after a couple of months I hardly missed the money. I have two savings account one is a long term emergency fund (eventually Ill save the equivalent of 6 months wages as a kind of self insurance against the unexpected.) the other newer account is meant to be way of saving up to pay the big bills like my car insurance and gym membership. Although I don't put much in about £50 I don't see the point of saving whilst in debt this time next year I expect it to be an important money pot. I save into an Abbey Postal ISA 5.5% tax free emergency fund and use ING Direct 4.8% taxable for my day to day pot.

Investments

I actually started putting money into investments some time ago. My first investment was a disaster putting £1200 into a technology ISA about a month before the DOT com bubble burst in 2000 was a pretty stupid way to spend my student loan. Anyway after doing some research I found that over long periods 80% of funds failed to beat the market averages, so rather than try to find a fund in the 20% decided hey why not invest in the market February 2004 I started investing £90 a month into Legal and Generals low cost UK all share index(costs are important as they seriously affect the performance of your money over the long term). So far thanks to a recovery in equities I am already well ahead of cash savings and I expect that this will be the case over an extended period 5 - 10 years. When I paid off my Apple loan I increased my monthly savings to £200 per month.

Pension

OK pensions are boring and if your like my dad pensions are heart breaking (his was with Equitable Life) however I guess its better to do something than nothing. Unfortunately my company doesn't have a pension scheme they have though arranged a salary sacrifice scheme whereby some of my wages is chopped off and paid, the bonus of this its done on gross wage (before tax or national insurance) so it works out a pretty tax efficient £250 a month (about 12% of my gross wage) will apparently buy me about £8000 (in today's money) when I retire its not great buy hopefully along with my other investments it will be enough to get by.

Overall

Well discounting my student loan I am now a net saver rather than debtor which is great news. My main goals now have shifted from paying off my debts to building up a sizeable asset column and saving a deposit for a house. I am hoping next year to fully use my ISA allowance investment £4000 in stocks and £3000 in cash. Plus saving and paying off my bills in a more sensible manner so that I don't feel squeezed form month to month.
If you want to stay out of debt and be finacially secure there are only two things you need to do,

1. Spend less then you earn, this miht seem like a no brainer because it is however on average people in the UK spend £11 for each £10 they earn. Youll always be in debt if you live this way.
2. Pay Yourself, for each paycheck keep a portion of the money for yourself this money is your to have an hold dont spend it keep it and let it earn more money. If you spend everything you earn and dont pay yourself will always be on the edge of financial meltdown hat happens if something goes wrong?
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