FOOL'S EYE VIEW

The Seven Principles Of Wealth

By Neil Faulkner (TMFVertigo)
April 20, 2006

In the world of finance there's an animal for everything. We have bull and bear markets, we've got stags, and we have interest rate hawks and doves. We have cash cows and vulture capital. We carry ponies in our wallets and, if we're very lucky, monkeys too. Then there are the leaches and loan sharks, and bulldog bonds, bear hugs and bear traps. It's a jungle out there.

But The Fool is a different kind of beast altogether, as yet unclassified - until now. A product of the Information Age, it's been transformed into another well-known and very real animal: the hydra. The main distinguishing feature of your common garden hydra is its seven distinctive heads, which work and weave in harmony to produce idyllic financial plans. Each head has some knowledge that it wishes to impart...

Advice from the investing head

Investing is so easy now. Just about any fool can do it. If you're not up for selecting shares yourself, you can whack your money into an index-tracking fund. In an index tracker, your money is invested in the shares of a specific index, e.g. the FTSE 100 (the biggest 100 companies on the London Stock Exchange).

This utilises two Foolish principles. Firstly, your money is better over the long-term invested in the stock market, rather than left as cash earning interest in a bank. Since the end of 1945, shares have done 20 times better than cash. Shares have also beaten cash every ten years starting from 1905 up to 2005.

Secondly, index-trackers don't require humans to make decisions. They are largely automated, so you're not relying on some random stranger to invest your money for you. Plus they outperform actively-managed funds 82% of the time!

You can wrap index trackers in ISAs, where you don't have to pay tax on any gains. You can contribute as little as £50 per month.

Advice from the insurance head

Payment Protection Insurance (PPI) is supposed to cover monthly payments on a mortgage, loan, credit card or store card if you lose your job or can't work due to poor health or an accident. However, the Office of Fair Trading estimates that insurers pay out no more than 20% of what they receive in premiums. In other words, you're gambling at 5/1 that you'll get a return. Why pay five times more than the risk is worth?

I have a similar grumble about mobile phone insurance. So often you can't claim and also it's very expensive for what you get...Don't get me started on this!

Advice from the pensions head

My first advice on pensions is the basic principle of when to start saving. If you put £100 a month from age 20 to age 30 into a pension and then stop, and someone else puts in £100 from age 30 to age 60, everything else being equal (like the growth rate of your pension pot), the person starting at 20 will probably have a larger pot of money at the end. That's even though the person starting at 20 will have contributed a third as much as the other. Saving early for retirement is clearly the way to go, but if you're getting on a bit and you haven't started, I suggest you start adding any bonuses, bequests and any other windfalls to your pot.

I have to rant now. How unfair is this? If you're born on 5th April 1960 you can take your pension when you turn fifty (unless your pension scheme says otherwise). However, if you're born on the 6th April 1960, you can't take your pension till you're 55. Curse your parents for waiting another day!"

Advice from the borrowing head

Fool, you've lost (one of) your head(s) if you don't look for the cheapest rates of borrowing, and you don't get much cheaper than 0% credit cards. Well, it's zero percent monthly interest with a 2% balance transfer charge, but it's still a cheap loan. You can find some great deals here.

One more thing Fool, you can improve your ability to borrow by analysing your credit records and trying to improve them.

Advice from the saving head

Mini cash ISAs are a bit like savings accounts. The main difference is that the interest you earn is all tax-free, whereas in a current or savings account, you lose a fifth of the interest in tax. You can pay into ISAs as little as £50 per month. I obviously suggest you look for the best rates (which are currently around 5%), but when comparing them use the AER figure, not the gross, as it's more accurate. I'd also look to see how easy it is to switch, because providers tend to worsen their rates after they've got enough people on their books.

The same goes for ordinary savings accounts, like the ones you can get at high street banks. They too can reduce the rate with little notice, and you could be hit by financial penalties if you switch away too soon. Although you can sometimes get better rates of interest with savings accounts, remember it's not tax-free like ISAs.

Advice from the spending head

With my consumer-awareness hat on (head rather), I can be rather savvy. I find cheap deals on the Internet, just like you do I'm sure. So from one spending head to another, you may be interested in some rules to protect you from dodgy websites.

You can always cancel goods if they are faulty but, for most online purchases, you're allowed to change your mind on a whim and cancel up to seven days following delivery, no questions asked. The product doesn't have to be faulty and you need no excuse. It needn't even have arrived yet. The seller must refund you.

This applies to CDs and DVDs (as long as you haven't unsealed them), books, electrical goods, furniture, a jester's hat or seven, sports equipment and many more goods. The main sorts of goods that don't apply are travel or event tickets and custom-made items (although add-ons such as alloy wheels and extra PC memory don't count as 'custom-made'). It also doesn't cover food or other perishables, or periodicals, newspapers and magazines.

If the goods are faulty, the seller must either pay for the return postage costs, or reimburse you for returning them. If the goods aren't faulty, the seller must still pay for recovery costs unless they've specified otherwise in the contract. If goods develop a fault within the first six months, sellers must assume they were faulty when they were sold and must reimburse you, unless they can prove otherwise.

To cancel an order, you must do so in writing, but the good news is that email counts!

Just one more thing: if you buy online using credit cards rather than debit cards, you have greater protection. For purchases of £100 to £30,000, your card provider must reimburse you if things go wrong and the seller itself is unable to do so. Recently, this was extended to overseas sellers as well!

Advice from the budgeting head

I'm the chief head, I reckon, because I co-ordinate all of the above. I decide how much money goes towards pensions, loan and mortgage repayments, bills, ISAs, insurance, food, gadgets and fun. I wasn't taught at school, because they teach quadratic equations instead of personal finance, so I've taught myself with the help of The Motley Fool.

I know spreadsheets with monthly budgets are boring, the other heads get fed up with me yakking on about them, but they're a necessary evil. They help us achieve all our goals, and the reward is more money for fun, and less on stupid debts.

But I don't need to tell you about spreadsheets! What I will say is, if you're looking for budgeting tips, you should visit The Motley Fool discussion boards, where there are lots of Helpful Fools. If you need advice on how much something will cost you or on how to get a better deal, someone is bound to know the answers. Like this recent post on the Building/DIY board.

So take the bull by the horns! Visit our numerous financial centres, including: Credit Cards, Loans, Mortgages, Insurance, Savings and ISAs.