FOOL'S EYE VIEW
Love & Money

By Christopher Spink
February 14, 2001

Great Titchfield Street, London – If you fancy making a million or just enjoying a comfortable retirement you won't get there by sitting on your backside. In fact falling in love with your finances can seriously slow your march to fiscal independence. When it comes to money many people switch off. Such apathy won't do though. Stubborn resistance to changing your financial habits may be holding you back.

So don't fall in love with your money, or rather don't be content with your current financial situation. You can do better! Here's how.

Ditch your debt!

Debts are the devil's work. Send them back to hell! If you've got burning debts lying around untouched, you're giving money away. Work out how much you owe in total and to whom. Then rank the various debts according to the rate of interest each one charges annually starting with the highest first. Include your mortgages and other major loans to buy cars, as well as credit cards and student loans.

If any of your debts has an interest rate more than one and a half times the current Bank of England base rate of 5.75% then aim to pay them off as soon as possible. Concentrate as much of your financial resources as possible to paying these debts down. This is because it's next to impossible to get your savings to grow quicker than 8.675% without taking risks and locking the money up for five years or so.

Cut up your credit card

You'll probably find any money outstanding on your credit card is charged double-digit rates of interest. Store cards also attract these high rates. Hire purchase agreements can prove a pretty hefty weight on your wallet as well. Mortgages should come in the low interest rate bracket, being a little above base rate. Student loans from the Government should be even lower, growing at the rate of inflation, 2% or so.

One sure fire way of getting rid of fast growing debts on your credit card is by cutting up your plastic. That way you won't be tempted to return to your bad habits. Make a clean break. Consider moving the remaining balance on your card to a provider charging less interest. Many card companies offer introductory rates that are below base rate, commonly for six months or so. Take these up.

Switch your savings

As the good book says, not money but love of money is evil. If you have cash in a current account it shows you love money too much. Current accounts offer terrible rates of interest for any spare savings. Some don't give you any interest at all. Put them in a savings account and make them work harder. Hate your cash!

Don't pick any old savings account your bank offers you though. You may already have one which pays 3% or so a year in interest. You can do far better than that. Switch your savings to one of the many online banks paying 6% or more -- double many so-called savings accounts.

Re-mortgage your home loan

If you really want to make your money work, consider re-mortgaging your house. This commonly means adding to your home loan in some way. Why not go the other way though and get yourself a better, i.e. lower, interest rate on your mortgage? Never has there been a better way of finding out about all the various competing products in the market than via the Internet.

You may find a mortgage offering significantly lower rates than your present plan. You could go one better and look at the new flexible-style mortgages. These allow you to put all your cash savings to work to pay off the mortgage. You can overpay as well, saving yourself hundreds of pounds worth of interest charges. Some will let you use the mortgage plan like a current account, if you pay in your salary.

Retire your pension

When did you last look at your pension plan? Have you made adequate provision for your retirement? Don't rely on your company pension scheme. How has it performed? It may not do as well as you thought. Pity the people who have Equitable Life policies. What's your particular predicament? Ask your provider for a projection of what you stand to get in retirement.

Consider looking at stakeholder pensions, which will be introduced this coming tax year. These have capped annual charges of 1%, much lower than other pension plans. Every employer with more five members of staff must offer one, if they don't already have a company scheme. Stake your claim!

Pep up your ISA

If you want to save for the future in other ways then do it efficiently. Use your maximum ISA allowance of £7,000 before the end of the tax year. This will protect any profits you make from capital gains or income taxes. Check what your old PEPs are doing. Tidy up your portfolio. And above all, buy individual shares to hold them for the long term. But follow your investments and switch them if something fundamental changes.

Split!

So break off your love affair and resolve to do something about sorting out your finances this Valentine's day.

Where Next?

Take a financial health check in the Fool School and learn all about saving and investing, as well as getting out of debt and re-mortgaging.

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