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FOOL'S EYE VIEW
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Last Friday afternoon, I gave a presentation on personal financial fitness to a group of young people. This event was organised by Black Young Enterprise, a not-for-profit community-based company that is committed to developing the entrepreneurial talents of African Caribbean young people. (Thank you to everyone who came along to listen to me ramble on for an hour!) Regular Fool readers will know that this sort of thing is right up my street. As I've said before, I'm not terribly interested in making anyone their second million (although I'll do my best to help). I'm much more interested in making someone their first ten grand, because this approach suits my straight-talking style! Without further ado, here are ten lessons that I urged these young people to learn: 1. Learn to budget It doesn't matter if you're on benefits or you're David Beckham. It doesn't matter if you earn £200, £2,000 or £20,000 a week. If you always spend more than you earn, you're going to find yourself in serious trouble one day! Learning to budget is the cornerstone of sound financial planning. By figuring out where your money comes and goes, you can increase your income and reduce your expenses. This creates a monthly surplus that you can use to build a better future. And if you're struggling to make ends meet, a second job can bring in more money and stop you from spending! 2. Shopping around always saves you money Impulse buying is a bad idea, because you usually end up paying over the odds. Shopping in (expensive) high-street outlets is rarely a smart move, unless you're a great haggler. Try using price-comparison and other websites to pay less for everyday goods. Here are seven of my favourites (in alphabetical order): www.amazon.co.uk | www.bookbrain.co.uk | www.cd-wow.com | www.dealtime.co.uk | www.dvdpricecheck.co.uk | www.kelkoo.co.uk | www.pricerunner.co.uk. Learn more in Websites That Save You Thousands! 3. The Lottery is a BAD bet We spend about £90 million a week on Lottery tickets and scratchcards. However, Camelot only pays back around £40 million in prizes. In other words, UK punters lose around £50 million a week, thanks to the Lottery! What's more, the chance of winning any Lotto prize is only 1 in 54, which means that over 98% of all tickets end up in the bin. Most winners get just £10 - even picking four correct numbers is a 1,032-to-1 long shot! And your chance of scooping the jackpot is almost 1 in 14 million - about the same chance you have of plucking a single lucky grain of sand from a wheelie bin full of the stuff! Ultimately, the Lottery boils down to a tax on gamblers, people who are bad at maths, and the poor (who spend the largest proportion of their income chasing this pipe dream). Punters should read what George Orwell wrote about the lottery in 1984. 4. Credit cards can be WMDs (Weapons of Money Destruction) If you always pay off your credit card in full every month, you can relax. If you don't, sky-high interest rates will wreck your finances. 1.5% a month doesn't sound too bad, but it comes to 19.6% APR, or annual interest of almost £200 on a £1,000 debt! Beware of the dreaded minimum monthly repayments. Let's say you treat yourself to a £1,600 widescreen TV for your 21st birthday. You then pay the minimum monthly repayments of 3% until this debt is paid off, at 19.6% APR. How long will it take to pay off this burden? The answer is 38 years and eight months – and you'll pay back a whopping £5,866 (£1,600 plus £4,266 in interest). So, you'll finish paying for your flash TV just before your 60th birthday – decades after it went on the scrapheap! Find your perfect plastic in our Credit Card centre. 5. Shop around for your car and loan The price displayed in a car dealership is the maximum price, not the price that you should pay. Think of it as a starting point for negotiations. Knock a fifth off that price and get haggling with the salesperson. Alternatively, play off a few dealers against each other to see who can produce the best price – or check out a few car websites. Learn more in How To Save £5,000 On Your Car. One big mistake is to take the dealer's finance package without shopping around first. The cheapest unsecured personal loan that I can find (borrowing £5,000 over three years) costs £5,432 in total. That's an interest bill of £432. However, I also found a similar loan that charged £7,883 – that's an extra £2,451 in interest. Yikes! So, shop around for finance before you look for a car – or save up instead! You'll find the UK's cheapest loan in our Personal Loan centre. 6. Make your mortgage work harder It's important not to over-stretch yourself when buying a home, Make sure that you can afford your monthly mortgage repayments, because if you can't, your lender will repossess (seize) your home and sell it. You can keep your repayments low by not staying loyal to any single mortgage lender. Shopping around when you can and switching your loan to the latest Best Buy could cut your interest bill by, say, £1,500 a year. Find a happier home loan in our Mortgage centre. Also, watch out for the rip-off insurance policies that banks sell, such as life, health, buildings and contents cover. Mortgage lenders often charge premiums around three times as high as those charged by Best Buy policies. Get a cheaper quote in our Insurance centre. 7. Get out of debt "Debt is the slavery of the free." (Publilius Syrus, 42 BC) If your debts are mounting up, you need to undergo radical financial surgery. Stop casual spending. Cut up your credit cards, as you can only afford to use cash. Start calling them DEBT cards, not credit cards, and see the difference this makes! Create a budget, so you know how much you can spare for debt repayment. Pay what you can afford, but throw all your spare cash at your most expensive debt until it's gone. Keep in touch with the companies that you owe money to – if you prove that times are hard, many will agree to stop charging interest if you insist politely but firmly! Finally, if things really are spiralling out of control, contact a free debt-counselling service, such as www.cccs.co.uk, www.nationaldebtline.co.uk or www.payplan.com. DON'T visit a fee-charging debt management company, as these gobble up money (typically, 15% of your payment) that should be used to bring forward your debt-free day! Get more advice in our Get Out of Debt centre. 8. Saving can be sexy Saving in a bank or building society account is a safe and simple way to build up an emergency fund, rainy-day money or nest egg. But it's important to find an account that pays a market-beating rate of interest - and check regularly that it remains a Best Buy. Almost all savings accounts are taxed, which means that taxpayers lose a fifth of their interest to the taxman (higher-rate taxpayers lose two-fifths). However, anyone who is sixteen or over can save up to £3,000 per tax year into a cash mini-ISA. This is a savings account that pays tax-free interest, usually at competitive rates, so you earn more interest. This Best Buy cash mini-ISA pays tax-free interest of 5.10% AER. 9. Get rich slowly: learn to invest Investing is riskier than saving, but more rewarding over long periods. Some people invest in antiques, art, property, wine or other assets. However, most investors aim to make money from the stock market, by buying shares in good companies. You could do your own research and pick your own shares, as I and other Fools do. However, this takes time, patience and practice. Lazy investors may prefer to invest in a 'fund', which pools together investors' money. Index trackers are some of the cheapest and simplest funds. All they do is track a particular stock-market index (such as the 'Footsie', or FTSE 100) up and down. They are passively managed by computers, which means that sackloads of your money aren't handed over to Ferrari-driving City suits! The good news is that you don't need to be rich to invest in an index tracker – monthly contributions start at around £25. You can invest in a low-charging index tracker via the Fool. Also, if you don't like paying tax, you can put a tax-free wrapper known as an ISA (Individual Savings Account) around your funds or shares. An ISA prevents the taxman from taking a share of the profits and income generated by your investment. Learn more in our ISA centre. 10. Prepare for old age: get a pension You use a pension to build up a pot of cash to live on after you retire. Many companies pay towards the cost of their workers' pensions. However, if you can't join a 'company' scheme, you can have your own 'personal' pension. Everyone – even non-taxpayers – gets government help towards saving for a pension. For every 78p that you put in, the government adds an extra 22p. If you're a higher-rate taxpayer, you put in 60p and the taxman adds another 40p. Rule One for pensions is: start early! Here's an example of how patience and time can seriously reward sensible investors: Which of these produces a bigger pot: Surprisingly, the answer is (1)! (1) produces a pot worth £339,972; (2) is worth £321,728. And it's all thanks to the joy of compounding, which Albert Einstein is said to have called, "the most powerful force in the Universe". Find a low-cost pension in our Pensions centre. So, learn to budget and spend carefully; shop around for goods and services; don't play the Lottery; stay out of debt; make your mortgage work harder; build up a savings pot; and invest for the long term. The road to riches is as simple as that!