It certainly looks all doom and gloom at the moment doesn’t it?
Open any newspaper or tune into the news on TV and if you are anything like me, you get punch drunk with all the articles on how bad the stock market or property market is etc etc.
It may seem perverse then to write an article on savings!
However, as ever, this is an immensely important subject that affects our clients’ future security. As we view a Doctor or Dentist’s financial affairs over at least 15/20 years, we can clearly see the effect this has on their overall position.
Quite often the savings and investments they made in the early years were fairly modest, but have now built up very nicely thank you over time. This helps massively towards their ‘Financial Independence Day’- the time they can choose to stop working.
Because the service we offer to our clients includes being able to look ahead at how their lives will look in, say, 15 years time (by using cash flow forecasts), we can show how much they need to save/invest NOW so that they do not run out of money in the future.
So, looking at the big picture, are we Brits serious savers?
Well, we certainly used to be. It took some time to recover from the war, but by the mid 1950s, we started to make real progress.
Here is the average UK savings ratio for 1960-1989:
60’s – 5.65%
70’s – 7.95%
80’s – 8.65%
The peak came in the difficult winter of 1979, when the savings ratio hit an all-time high of 14.1%, or to put it another way, one in seven pounds.
Now let’s look at how well we saved in the Nineties:
1990 – 1994 – 10%
1995 – 1999 – 8.28%
Yes, we saved hard during the recession of the early Nineties, but our savings habit started to slip when the housing market took off from the mid 90s onwards. However, things have certainly taken a turn for the worse recently, as the final table shows:
The UK average savings ratio, 2000-2008:
2000 – 2003 – 5.35%
2004 – 2008 – 4.30%
So, a declining trend, and the situation gets even worse.
In the first quarter of this year, the savings ratio collapsed to 1.1%. This is £1 for every £90 earned after tax, and takes us to a 49 year low.
In the past, a squeeze on our disposable incomes would have made us look to cut back and save more. Sadly, after a twelve-year housing and credit boom, it appears that we’ve almost forgotten how to save.
Of course, the purpose of having a bit of a financial cushion was to help when the bad times came. Well, the bad times are here, and for some people it looks like the cushion that has been there in the past is no longer available.
Perhaps the more you earn the more leeway you will have. However it is our experience that the more you earn the more you spend! (It’s important to focus on how much income you’re left with at the end of the month, not necessarily how large the income is).
So, ask yourself – are YOU saving enough?
Key Considerations:
It does pay to save. If you are serious about optimizing your finances to secure your future, do look at what you can afford to save and invest.
Once this is decided make sure that this money is targeted at fulfilling your goals in life.
ACTION POINT
Ensure you have an up to date expenditure template to identify where your money is spent, and compare this to your income now and in the future by analyzing your cash flow forecast (CFF).
This is VITAL.
If you do not have a CFF, ask your adviser to build you one, and if they cannot do this find a planner who can.
Do you have the scope to save/save more? If you have – do it!
It will bring Financial Independence Day nearer!
By: Ray Prince
Posts Tagged Housing Market
Capitalism has many benefits in a free society. It has inherent benefits to those who are creative and willing to work hard. Nowhere else can such a variety of people from many diverse backgrounds and countries succeed by their own efforts.
However, sometimes our creative efforts cause serious problems. As a people, we have become enamored of things, possessions, and goods. We want to own the biggest house, the biggest automobile and other possessions without number. And for all the things we say we want, there are manufacturers ready and willing to provide them. In order to be competitive these same manufacturers are always seeking better ways to convince us that it is possible to own that Cadillac El Mundo Gordo Magnifico SUV when realistically we can only afford the Ford Sub-Midsized ordinary Sedan. Desire for things, plus superb salesmanship overcomes common sense and basic math. The result can be what the subject of this article is all about.
Let’s clear up a couple definitions.
Equity: The market value of a property (house or car or whatever) minus any mortgage or money owing on the property.
Example # 1 Positive Equity: You have owned a house for thirteen years. Its market value is $400,000. You owe the bank $225,000 over the next seventeen years. Your equity in the house is $175,000. This is positive equity.
Example # 2 Negative Equity: You buy a house for $300,000. The housing market changes and the market value drops to $200,000. You owe the bank $225,000. Your equity in the house is $25,000. This is negative equity and sometimes referred to as being “upside down”. This is a very bad thing.
Negative Equity occurs frequently with automobile purchases. What do you do if you’ve had the car two years and want to trade it in? The “upside down” buyer frequently adds the amount on the trade-in onto the loan for the new car. They also stretch out the loan to keep the payments low. This is a losing proposition as the longer the loan, the longer it takes to reach a point where they owe less than the vehicle’s depreciating value. It is a financial Catch-22.
How does this happen?
It is a combination of things. In order to sell more cars, manufacturers offer deep discounts on new cars. This has the effect of depressing the value of cars, which coupled with five and six-year loans means it’s going to take much longer for car owners to achieve a position of positive equity. (two to three years is not unusual)
It is a fact that the moment you drive your car away from the lot it is a used car. If you are paying $45,000, the Kelly Blue Book value may be $40,000. If you still owe $43,000, there’s a $3000 difference. How do you protect yourself if you have an accident? Now the vehicle owner has more problems.
Gap Insurance
Why is an auto gap insurance policy so important? Because standard comprehensive and collision auto policies only cover your new car’s “fair market value”. And that can be as little as 80% of what you paid for your car, starting the minute you drive it off the lot. This condition of negative equity may exist for the first two or three years of ownership.
This means that if you’re involved in an auto accident that leaves your new car “totaled”, you could end up paying off a loan on a car that you can’t drive. This is where gap insurance comes in. A gap car insurance policy insures you for the difference between what you owe on your car and what your insurance company says it’s worth. In some cases this insurance will be required as part of purchase or lease.
Gap insurance coverage would also become critical if your car is stolen. Thieves prefer new cars and they seek out specific models, which usually happen to be the most popular models of cars sold. (Honda Accord, Ford Taurus – etc. etc.)
If your car is stolen, the insurance situation is the same as in the case of an at-fault accident on your part: comprehensive insurance will cover the value of the vehicle, but not necessarily the value of the loan that you owe to the bank. You could be stuck paying thousands for a car that’s long gone. Add that to the truly disheartening feeling of having your car stolen, and that makes for a really rough time.
As a Lemon Law firm, we see many situations of negative equity when a case is being settled with an auto manufacturer. Often it is the first time the owner discovers the reality of being upside down on their loan or lease. It is always painful. We certainly could offer scads of advice about this situation. The first piece of advice would be, never buy something that is beyond your means. This advice will surely be ignored over and over. The other thought, which isn’t really advice is, if you get caught in a situation where your negative equity is going to be expensive, bite your lip and promise yourself you will never get in that sort of situation again. It’s bad for you and accepting these kinds of deals only encourages manufacturers and their financial organizations to offer these “good deals”.
By: Donald Ladew