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 Investments
Equity method accounting is used when an investing company owns stocks of another affiliate company. There are several different ways of accounting for this ownership, but this method is perhaps the most popular.
Equity method accounting factors in the increase or decease in profits of the invested company. These differences are usually unrealized and not actually obtained by the investing company. The increase or decease is, of course, calculated on the percentage of stocks owned and does not account for dividends paid. For example, if an investor owns 100 shares of an affiliate’s stock. And if that stock increases 10%, only those 100 shares will reflect the 10% increase. The investing company will then record that increase as profit on their ledger.
Before going further, it is important to note that if a parent company owns over 50% of a subsidiary company, equity method accounting is not allowed. Consolidated companies are required to combine the financial figures into one statement for the group of entities.
This information, found through equity method accounting, can be very helpful to a company. If understood correctly, the profits or losses of affiliate companies can help forecast the total equity of the company. This total equity can show trends of upward or downward value of the investing company.
If this information is wrongly considered, the effects can leave the company high and dry. Dry, in this case, meaning out of money. If the profits found with the equity method are considered physical liquid assets, the company’s operating capital will be wildly off the mark. This is why it is very important to understand that equity method accounting determines value of investments, but rarely shows finances that can be readily used.
Equity method accounting highly increases the appearance of financial standing. Including all investment gains as profit really boosts the income side of the balance sheet. A major advantage to padding this stat is the likelihood of getting loans, raising capital, or getting investors.
Just think, as a loan officer, if a company showed records of $100,000 in profits instead of $75,000. That makes a big impact on whether or not to give a loan and how much to loan out. This scenario works the same for the decision of an outside investor or joint venture opportunity.
Other factors exist as to whether or not an investing company uses equity method accounting or not. There are tax requirements for the amount of investment in the affiliate company. If the investor has significant influence or not and the percent of ownership plays a role in using this method of accounting as well.
By: Joe Coffee