FOOL'S EYE VIEW
Six Steps To Total Financial Security!

By Cliff D'Arcy
September 15, 2005

Frequent readers of the Fool will know that my personal finances haven't always been shipshape - and that's some understatement!

In fact, during the Nineties, my money management was appalling - and I paid a hefty price for my negligence. I paid a fortune in interest and charges to lenders, plus I spent many hours every week juggling my finances, robbing Peter to pay Paul, trying to get more credit and so on. What's more, money worries kept me awake at night and, eventually, my financial problems came to dominate my life. It's a familiar tale to millions of us, I'm sure!

Anyway, I only began to see the light in 1999, when I decided that it was crazy to spend my time - in effect - working for a string of banks. I was earning a good wage, yet I was slipping deeper and deeper into debt. Once I'd grasped the fact that things had to change, I embarked on a journey that ultimately led to me joining the Fool and writing this article today!

Naturally, the techniques and tactics that I used to "turn my tanker around" have evolved over time, usually for simplicity's sake. These days, thanks to the demands of my young family, I try to spend as little time as I can on my financial affairs. What's more, if I am kept awake at night, money worries are never the cause! Here's how I run things today:

1. Budgeting and spending

The golden rule of money is: spend less than you earn. Despite being perhaps the simplest and oldest financial message ever invented (the Romans said Sumptus Censum Ne Superet), it is widely ignored these days. People are happy to use credit to subsidise their lifestyles not realising that, by spending tomorrow's money today, they are weakening their financial future. For the record, for every £100 of take-home pay, we Brits are spending £110. Crikey!

So, my first lesson was that it was time to cut back, as I had Champagne tastes and a beer income. I kept a spending diary to monitor my outgoings and cut out a few luxuries and frills. Of course, my budget doesn't always balance, even today, but I haven't been overdrawn for almost three years, so I must be getting something right. To get started, read 25 Quick Money-Saving Tips for advice on slashing your expenses, and check out these Ten Top Tips To Win A Pay Rise.

Another important skill that I started to use was haggling. Being a working-class Northerner at heart, haggling was in my blood, so I stopped looking at ticket prices and began negotiating to reach the prices that I wanted to pay. I summarised my techniques in The Best Ways To Pay Less! If don't like bargaining, let price-comparison websites do the work instead.

2. Borrowing

In early adulthood, borrowing money to fuel my bad habits and vices was my downfall. I borrowed £5,000 at a time on personal loans, and maxed out about fifteen credit cards during my slide towards near-bankruptcy. Nowadays, I'm an anti-debt campaigner, as I know only too well the damage that it can cause.

However, here's something crazy to think about: this is the first month since I started work that I don't owe anything to any lender (other than on the credit card that I always pay off in full by Direct Debit)! From 1992 until this spring, I had a mortgage, plus I kept borrowing on credit cards, even after straightening myself out. However, for almost five years, I've avoided paying interest by using a string of 0% credit cards.

If you have debts on credit or store cards, you may be paying interest rates of between 15% and 32% a year. This is daylight robbery, especially when you consider that the Bank of England's base rate is a mere 4.5%! To give yourself a breather from sky-high interest rates, transfer your existing balances to one of the dozens of credit cards that charge no interest on transferred debts for up to a year. We have several of the leading Best Buys in our Credit Card centre.

Although my motto is "Don't do debt", I am realistic about it, because we're all forced to borrow at certain points in our lives. However, if you're buying a home or already have a mortgage, shop around for a lower rate whenever you can switch without penalty. Not doing so costs a typical homeowner about £1,500 a year and turns your mortgage from a 'good' debt into a 'bad' one! The same advice applies if you need a personal loan to pay for a car, holiday, wedding and so on. Before you go looking for one, read these ten rules to find a personal loan.

You'll find great mortgage deals and the UK's cheapest personal loan here at the Fool!

3. Saving

Once I'd demolished my debt mountain, I began saving in earnest. I wanted to earn the highest rates of interest and avoid paying tax, so I opened a series of cash mini-ISAs. If you are sixteen or over, you can deposit up to £3,000 per tax year into a cash mini-ISA and earn tax-free interest. You can earn more about cash mini-ISAs and savings accounts in Three Steps To Becoming A Super Saver.

The highest savings rates are found online - we have several Best Buys in our Savings centre.

4. Insurance

I don't agree with the widely held view that insurance is 'dead money'! Sure, some insurance products are utter dross, such as rip-off payment protection insurance and extended warranties. On the other hand, you need to protect your most valuable assets: your earning power, spouse or partner (even if s/he doesn't work), home and its contents, car, etc.

Personally, I have a life insurance policy, plus the Fool covers me for three times my salary if I die while employed by it. My wife has similar cover, too. Also, the Fool gives me free income protection insurance, valuable cover that will pay half my salary each month if I am too ill to work for six months or more.

Furthermore, I always buy travel insurance when I go abroad, usually a Best Buy annual policy. My wife has comprehensive motor insurance and breakdown cover for her car, and we buy extra cover when she's driving abroad. I don't need buildings insurance, because I'm renting, but I do have cheap contents insurance for my possessions. I also have dental insurance through my wife's company scheme and the Fool pays for my private medical insurance.

Although I'm undoubtedly a good customer for insurance companies, all of this protection helps me to sleep soundly at night. Whatever fate fortune flings at me, at least I'm prepared for the worst!

Get a competitive quote for all of these policies in our Insurance centre.

5. Pensions

My view of retirement is simple: if you don't have a pension, you don't have a future. The basic state pension is pitched just above starvation level and, even with additional benefits, many British pensioners endure meagre living standards.

Of course, how you fund your pension is up to you: a company or private scheme, ISAs (see below), property, etc. However, not saving anything for retirement is not an option if you want to enjoy your post-work years. After fifteen months at the Fool, I took the plunge and joined the Fool's Stakeholder pension scheme last April.

This tax year, I will pay in about an eighth (12.5%) of my gross (pre-tax) income, but this will only cost me 7.5% of my salary, thanks to higher-rate tax relief at 40%. The compelling reason for joining my company scheme is that the Fool matches my contributions pound for pound, up to 7.5% of my salary. In other words, during 2005/06, a fifth (20%) of my income is being poured into my pension. I have been working on and off since 1987, but only half of this period is pensionable service, so I'm upping my contributions to make up for lost time. Oh, I wish I'd started my pension planning earlier in life, because it would have cost so much less to fund!

Learn more in our Pensions centre.

6. Investing

This is the fun bit, and the area of my finances that really boosts my confidence. I've been investing in shares for about eighteen years now, and I've learnt some cruel lessons along the way. These days, I use a 'value investing' approach - picking shares that I think will beat the market over the long term, but have limited downside. After one or two big losses, I know that one of the most important factors of investing is not making money, but trying to avoid losing it!

Although I select my own shares, much of my family wealth is tied up in what is probably the simplest stock-market investment around. I'm a big fan of index trackers: cheap, flexible funds that purely track an index up and down with little or no human intervention. Thanks to their ultra-low charges, trackers beat more than four out of five (80%) human fund managers over a twenty-year period. My Fool pension goes into a tracker, as do my wife's extra pension contributions, plus I invest lump sums into trackers whenever the mood takes me.

Also, I think that the FTSE 100 (the index that values the UK's one hundred biggest listed firms) looks cheap in historical terms, and other Fools agree. I've been backing my bet by buying iFTSE 100 shares for the last year-and-a-half, which track the index at low cost - learn more about these here. Doing much of my investing inside a tax-free ISA wrapper also keeps the taxman at bay!

If I had to sum up my biggest financial comfort, it would be this: moving from being a borrower to being a saver and investor has turned my life around - and, one day, will make me rich!

Good luck with your financial planning!

More: Get better 0% credit cards, personal loans, mortgages, savings accounts, insurance, pensions and investments via the Fool.