FOOL'S EYE VIEW
Living By the Book – Lift Off!

By Jane Mack (TMFJane)
October 5, 2001

Poor Katherine! She does me a favour by promising to Live by the Book for a month and gets nothing but flak from me in return. Good job she's such a sweet-tempered girl!

As we mentioned last week, we enlisted Katherine's services to make a note of every penny she spent throughout September so we could investigate (publicly) where all her money is going. And then castigate her (also publicly)! Yes, she agreed to our terms and conditions in full!

First, let's give you some information about her. Katherine is 28 years old, earns £21,000 a year (which is slightly less than the national average wage of £22,500), and has just moved into a rented flat with a friend in London. Her take-home pay is £1,330 a month.

Here's what she had to say about her first week of noting her spending:

"Week One: September 1st – England v Germany! Not the best day to start this spending diary as am in the pub!! But I am looking forward to doing this and finding out where my money goes."

Week 1 expenditure

"End of first week – nearly £550! What happened?!

Already I feel that I have to justify myself! This has been a slightly unusual week. I've just moved so am getting final bills from old flat. Large phone bill as sister was living in Spain. She talks a lot! Boyfriend's birthday and enrolled at night school! Aside from that I seem to spend an awful lot on food & drink."

I'll make no comment at this stage about her general spending (I'll save that sort of fun for next week!) but you can see from the first week's expenditure that Katherine has a loan. We ought to look at it a little more closely because this loan was specifically taken out back in May to consolidate a number of debts. At the time her debts looked like this:

Debt                Amount           Rate of Interest 
Loan                  £714                19.9%
Credit Card           £600                19.4%
Overdraft           £1,091               16.99%

As you can see, the interest rates on all these various borrowings were rather high so the primary aim would have been to switch them to loans or credit cards with much lower rates of interest. For example, the loan and the overdraft could have been rolled into one consolidation loan at the lowest rate available (there are some with rates of about 8%), while the credit card could have been transferred to a card that offers a low rate for balance transfers (there are several around which charge less than 5%).

What Katherine decided to do five months ago was to get a consolidation loan for the entire amount, payable over two years, so that she only had to think about making one payment a month. Now in the normal course of events, this isn't a bad idea in itself. Rolling all the debts into one can make life a lot easier. However, it's important to appreciate that one is still in debt - so you should never take out this sort of loan unless you're determined not to run up further debts during the repayment period.

Unfortunately, Katherine made three mistakes. Well, two and half, I suppose...

The total debts amounted to £2,405 but Katherine decided to borrow £2,750 so that she could have a holiday as well as consolidate her borrowings. (This is not how you get shot of your debts!)

She got her consolidation loan from her bank – at an interest rate of £19.9%! (The idea is to borrow money at a low a rate of interest – not one of the highest!)

She also took out the bank's loan protection insurance which amounted to £341. (This is really only 'half a mistake' because these are often a waste of money if you feel fairly secure in your job and in good health. It's true no job is ever totally safe, and neither is ones health - but, since these insurance policies only cover your monthly payments until you can get another job or get fit again - you should think about whether you could afford to make those payments for a couple of months yourself. In other words, it's a risk not taking out the insurance, but it might be a risk worth taking).

Anyway, if you've done your sums, you'll realise Katherine started out with three debts of £2,405 and converted them into one of £3,091. So, far from taking action to really sort herself out, she incurred a further £686 of debt and ended up paying a higher rate of interest overall!

It gets worse! By the time the repayment period is over, she will have paid a total of £3,713 to the bank - which means that she will have paid a stunning £1,308 for the privilege of borrowing £2,405 in the first place.

Hmmm...I'll leave you to imagine what I said to her when we discussed the matter.

In case you're wondering – I'd like to point out that no humans or animals have been harmed during the course of this project! So far! See you next Friday.

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