FOOL'S EYE VIEW

Ten Terrifying Financial Facts!

By Cliff D'Arcy
March 23, 2006

I'd be the first to admit that I'm a "number nerd", because I collect statistics in the same way that philatelists collect stamps! For example, here are ten scary statistics which I've come across over the last year or so:

1. We spend a tenth (10%) more than we earn

Mr Micawber in the Charles Dickens novel David Copperfield elegantly explained that persistently spending more than you earn is a recipe for misery. Alas, according to a 2004 report from the Financial Services Authority, on average, we Brits spend £110 for every £100 of take-home pay.

Naturally, this extra money has to come from somewhere, which suggests that we're living for today by dipping into our savings or building up debts. By projecting figures from the Bank of England, I reckon that we took home a total of £834 billion last year. Hence, we may have overspent by as much as £83 billion, or over £3,300 per household. Where did it all vanish to, I wonder?

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2. We'll soon owe a trillion pounds to mortgage lenders

At the end of January, British homeowners owed a record £975 billion to mortgage lenders. Seven years earlier, in January 1999, we owed just £458 billion. Hence, our mortgage burden has grown by £516 billion in just seven years, which is the biggest increase in debt in British history.

By my reckoning, our total mortgage debt will exceed a trillion pounds no later than the end of May. At this point, we'll be paying roughly £55 billion a year in mortgage interest, which (despite historically low interest rates) is more than we've ever paid in the past. Ouch!

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3. We'll soon owe £200 billion on top of our home loans

According to the Bank of England, total unsecured debt (including credit and store cards, car and personal loans, overdrafts and so on) topped £193 billion at the end of January. In January 1999, we owed a mere £102 billion, so our non-mortgage debt has almost doubled in just seven years. Here's my next prediction: by the end of November 2006, we will have amassed over £200 billion of debt, costing us up to £30 billion a year in interest. Double ouch!

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4. Your credit card can be a lifelong burden

For argument's sake, let's say that you spend £2,000 on, say, an all-singing, all-dancing television, paid for with a swift swipe of your credit card. Now let's assume that your card charges monthly interest of 1½% (19.6% APR) and you repay this debt by paying only the minimum monthly repayments of 2% (minimum £5).

Guess how long it would take to pay off this debt? Five years? Ten? Twenty? Nope, you're not even close: the answer is an astonishing 42 years and four months! Worse still, your hi-tech TV ends up costing you a total of £7,466, being your original two grand plus £5,466 of accrued interest. Shocking, eh?

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5. Three-fifths of our wealth is tied up in housing

According to the Halifax, the total value of the UK's private housing stock hit £3.4 trillion at the end of 2005. Ten years ago, this figure was £1.1 trillion, so the value of our homes has tripled in a decade. If we subtract our mortgage debt to calculate our housing equity, this has grown from £0.7 trillion in 1995 to £2.4 trillion today. That's an increase of £1.7 trillion, or over £97,000 per owner-occupied household!

Indeed, our £2.4 trillion of net housing wealth is the UK's biggest financial asset by far, with all of our other financial wealth (including cash, shares and bonds) totalling just £1.6 trillion. Thus, with three-fifths (60%) of our entire wealth tied up in property, we have a massive egg in this particular basket! That's why I'd recommended spreading your risk by putting money into other assets, such as cash and, in particular, shares, which still look cheap.

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6. We've splurged a heap of housing wealth

As I explained above, thanks to soaring house prices, British homeowners have enjoyed a massive increase in their wealth. Some people have taken advantage of this gain by borrowing against their property and spending the money on other things, which is known as mortgage equity withdrawal (MEW).

In the past five years alone, we've MEWed over £200 billion, which has been splurged on goods other than property. I guess MEWing helps to explain how we've managed to spend far more than we've earned over this period!

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7. The taxman takes three-sevenths (42%) of your dough

According to the Organisation for Economic Co-operation and Development, the overall tax burden in the UK is 42.4% of our gross domestic product, or three pounds in every seven generated. Amazingly, this is even higher than the fiscal burden of tax-and-spend nations such as Germany, and is far above the average for the G7 group of leading nations.

With more tax rises announced in yesterday's Budget, we should brace ourselves for even higher tax bills in the years to come. However, if you'd like to cut your personal tax bill, read the ten tips in Tax Tricks For 2006.

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8. We have forgotten how to save sensibly

While we've become expert in blowing money, we've also forgotten the noble art of saving. As I explained in Britain's Cash Crisis, half of all UK households have savings of less than £1,500, and a further two in seven (28%) have no savings whatsoever. What's more, of those that do save, most pointlessly pay tax because they don't stash their cash in a simple, tax-free savings account.

In addition, we save a far lower proportion of our take-home pay than we used to. Back in 1995, we used to save a tenth (10%) of our disposable income. Alas, these days, we save a little over half as much, at just 5½% of our take-home pay. Whoops! Still, if you'd like to be a better saver, read Your Ultimate Guide To Saving.

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9. Most people don't make tax-free returns from shares

Although there are around 30½ million taxpayers in the UK, a disappointingly small fraction are building long-term wealth by investing in the stock market via a tax-free shelter known as a shares ISA. Indeed, according to figures from HM Revenue & Customs, only 1.2 million shares mini-ISAs (current limit: £4,000 per tax year) and 1.5 million shares maxi-ISAs (limit: £7,000) were opened in the 2004/05 tax year.

Hence only 2.7 million adults invested in shares via one of these tax-free shelters in 2004/05, which comes to one in eleven taxpayers (9%) or one in eighteen (5½%) of all 48 million British adults. People who had the foresight to invest in shares a year ago have done very well, as the blue-chip FTSE 100 index is up more than a fifth (20%) since then!

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10. Three in seven workers aren't paying enough into pensions

A report from the Pensions Commission estimated that three in seven workers (42% of the workforce, or twelve million people) are saving nothing, or too little, towards their retirement. In order to fill this 'pensions gap', the Commission estimates that British workers need to contribute an extra £5 billion a month towards our pensions, or about £160 per worker per month.

Frankly, this is never going to happen, even though pensions are about to become far more attractive, thanks to the arrival of Pensions A-Day on 6 April. Therefore, most British workers will reach retirement with inadequate pension pots, so millions will be forced to rely on the State for the bulk of their income. Personally, I'd rather put as much as I can into my pension now, rather than spend my twilight years eating baked beans in a chilly bungalow!

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I hope that this article hasn't made your hair turn white or fall out with shock. Still, if you are feeling worried about your finances, don't delay: get to work building a better future today!

More: It's time to find better credit cards, personal loans, mortgages, tax-free savings, investments and pensions!