FOOL'S EYE VIEW
Four Ways To Stop Overspending

By Jane Mack (TMFJane)
October 4, 2005

The other day I went for a wander around Liberty in Regent Street - or rather, Liberty of London as the department store grandly likes to call itself. I hadn't been in there for nigh on 16 years when I was trying on wedding dresses and it was a revelation. Crikey, it was expensive!

A blouse for £375, a skirt for £695 and an ordinary day dress for £790? In Liberty's they don't need to tack on the 99p bit! I kept my eyes peeled for the likes of Julia Roberts and Renee Zellweger who are surely the only people who can actually afford this stuff but, no, the shop seemed to be pretty much full of ordinary people like me. No wonder we're a nation in debt!

In between laughing at the ridiculous prices, I did some 'anti-shopping sums', something I read (and wrote) about fairly recently. The idea is that you work out how much you need to earn before tax in order to buy something.

For example, there was a rather beautiful designer evening dress priced at £1,395 - perfect for a film première, if you're actually invited to one. I worked out that a basic rate taxpayer would have to earn £1,788 in order to pay for it while, even worse, a higher rate taxpayer would have to earn £2,325 - nearly £1,000 more than the price tag!

All you do if you're a basic rate taxpayer is divide the purchase price of any item by 78 and then multiply it by a 100 to get the real cost of what you're buying. Higher rate taxpayers need to divide the sum by 60 and then multiply by 100. A simple but effective calculation that can seriously help to put you off spending! (In reality, you'd probably also have to pay National Insurance on these earnings so the actual amount you need to earn will be even higher).

Of course there are people who do earn enough to buy expensive things on a regular basis but for most of us £2,000 plasma TVs and digital camcorders for £1,000 are occasional one-off purchases and often we pay for them with the help of a credit card.

The key thing to remember when you're whipping out the plastic is that what you earn and what you spend are linked - something some people unfortunately seem to forget. It's not how much you owe, but how much you owe relative to your income that's important.

According to the Consumer Credit Counselling Service, no-one should be spending more than a fifth of their monthly take-home pay on meeting minimum repayments on non-mortgage debt. If you are, you need to cut back on your spending and start paying off existing balances.

The four questions to ask yourself when planning a hefty purchase are:

1) Can you really afford it?

Often, we only think about short-term affordability. We may feel that we can afford to pay off the purchase over a period of, say, six months. But further purchases keep the debt on the credit card running and six months can turn into years.

2) Have you shopped around?

There are two aspects to this. Shop around for the best deal for your purchase because you can save a fortune if you do your homework. The second is that if you're using a credit card then make sure you're taking advantage of 0% deals for new purchases. If you already have a balance then transfer it to a 0% credit card to ensure you're not paying interest on it. For the most part, many of us are paying more than we need to in interest charges simply because we're too lazy to shop around. Don't make that mistake!

3) How much will you pay back in total?

This is another thing people often ignore. If you borrow £1,000 on instant credit at an APR of 25% over five years, you'll pay £675 in interest for the privilege. How much do you really want that widescreen TV? Do you really need it right now, or could you save up for it? What's so wrong with your current television set, anyway?

4) Do you really want payment protection insurance (PPI)?

This is a particular favourite with lenders. Often, taking out payment protection insurance is presented as the default option. Since many of us don't bother to read the small print, it's possible to get lumbered with paying extra for something that we probably don't even need. You don't need PPI or won't be covered fully if you're: self-employed, on a short-term contract, have savings that could cover the monthly repayments temporarily, or have any other income protection policy.

Don't overextend yourself and, if you think you may already have, contact the Consumer Credit Counselling Service or Payplan, who will help you to sort out your finances for free. (Avoid debt-management companies that charge fees - you're wasting your money).

Ninety-five per cent of people who use credit cards regularly will probably be OK but for those who are worried, it is best to seek help as soon as possible. More than half of CCCS's clients say that they waited too long - many of them took more than a year after they knew they had a problem to ask for help.

Take advantage of the best credit card deals.