Personal Debt in an Improving Economy

The travails of personal debt

Personal Debt is the subject of the following guest post from a financial writer looking to discuss the particulars of how the changing economy affects those holding debt.

Earlier this year, there were a few signs that the UK’s job market was about to experience some much-needed growth. Today, the number of people out of work has now dipped below the 2.5 million mark, giving many hopeful job-seekers reason to believe that there may be good news just around the corner, but all isn't completely rosy just yet.

Despite the fact that the UK economy as a whole is starting to slowly rebound after the downturn which lasted from 2007 until the end of last year, personal debt remains a massive problem, especially for those on low incomes. Among those most likely to find themselves with debt to pay off are low-wage workers, part-time workers and anyone who is long-term unemployed.

Homeownership affects debt levels

One of the main indicators of whether or not someone is likely to get into debt is income, but home ownership can also have a profound impact on the likelihood of someone’s finances being in the red. A study from revealed that there was a sizeable disparity in incomes between home owners and non-home owners in favour of the former group.

Typically, home owners earn £900 per month more than those who don’t have a place to call their own. However, more of that money is likely to go on mortgage repayments than debt, as well as taxes such as stamp duty which home owners tend to be lumbered with. As mortgages tend to be pretty expensive, home owners are likely to have more debt, but it’s usually manageable.

Low incomes mean more problems?

The study also revealed that, of the people coming to them for debt advice, just 23% were home owners, and that, on average, non-home owners spent 88% of what they earned. Although that’s a pretty high figure, it’s lower than the same statistic for home owners, who typically spend up to 97% of their income each month.

Nevertheless, it seems that non-home owners are more vulnerable, especially when it comes to repaying certain types of debt such as loans or overdue bills due to the likelihood that they earn less. To learn more about how home owners and non-home owners differ when it comes to personal debt, income and dealing with debt, view the full results by clicking here.

Interested in guest posting or writing a sponsored post? Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment.

Pensions: better to take a lump sum or leave it?

The importance of pensions

Interest rates are extremely and historically low. As a result, there has been a lot of recent news about annuity rates for pensions being incredibly low. Given that this is the case, I want to discuss whether it might be better or not to take your 25% tax free lump sum from your pension pot.

Pension explanations

At this point, some of you may be wondering what an earth I'm on about. As this may be the case, let's take some time to set out some key definitions:

Pension - nowadays this tends to mean a pot of savings from which a person will live off once they have retired. In its most basic form a person can either live off the savings or exchange the savings pot for an annuity (see below) to pay an income for life. 

Tax free lump sum - most pensions allow you to take up to a 25% lump sum from your pension pot upon retirement. The remainder in the pension pot is used to buy the annuity (below).

Annuity - the pension pot is transferred to an insurance company who in exchange pay you an annual salary for the rest of your life. There are several types of annuities to be purchased but for simplicity we will consider a few. One pays you a set amount (e.g. £20,000) every year for the rest of your life. Another may be linked to inflation such that it would pay you a lower amount in the first year (e.g. £10,000) but that the payment would increase by a rate of inflation each year. There are also variants of the inflation linked annuity at different inflation or percentage rate annual increases. 
The size of the annuity is determined by several variables:
1. The size of the pension pot - obviously the higher this is, the higher the annuity
2. The timing of the purchase of the pension - the later you buy one, the higher it'll be worth
3. Your medical history (yes that's right!) - the more likely you are to die young the bigger it'll be
4. Lump sum that you take out - the more you leave in your pension pot the bigger the annuity you can buy I.e. the more you'll be paid annually
5. Linking to inflation - if you link your annuity to inflation figures then you can expect to receive less in the first few years than had you not linked it to inflation. This is because the amount that you are paid per annum wi increase each year with inflation.
6. Interest rates - the higher interest rates are, the higher the annuity payments per year. Without going into too much detail this is partly because to pay you your annual amount the annuity provider invests some of your money in investments linked to interest rates. Thus, the higher the interest rates, the more money the annuity providers make from your pension pot, and the more they can pay out to you per annum.

The case for taking your full lump sum

The argument goes as follows:
Annuity rates are so low at the moment that you will probably end up with an annual income from your annuity much lower than originally expected when you first started saving for your pension. As such you may be able to supplement this smaller income by reinvesting the lump sum. For example you could earn rental income by purchasing an investment property. Or you could earn additional income from dividends by investing your lump sum into Shares.

The case against taking a lump sum

Some may argue that to take any lump sum with such low annuity rates is madness. Your pension income is already lower than expected so why would you choose to reduce it further by taking a lump sum pension?

Pension lump sum - Balancing the argument

I suppose your decision really depends on your circumstances. For example, let us say that you already had plenty of other investments providing multiple streams of income. As such you may believe that you can comfortably take the risk to invest the lump sum elsewhere. This may be the case as you can afford to cope with the worst case scenario of a poor return on your alternative investments for a few years.

Taking the lump sum is definitely the more risky strategy in the short term but could definitely work out in the long run as you eventually make a return on your investment (assuming you live that long!).

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Don't go over your credit limit

Credit card danger beware

I've always encouraged the use of credit cards. I have written several articles on the benefits of making purchases with a credit card over debits cards and cash. The only caveat I have ever made is that the credit card should be paid off in full every month.

Paying your credit card off in full should prevent any charges from being incurred and ensure that you will never have to pay he heavy interest charges. I set up a direct debit from my current account to pay off the card in full each month. So, it was to my surprise that on my last credit card statement there was a charge for £12. My immediate thought was that there must have been some sort of mistake as I proceeded to call my bank to sort out the problem and ensure that I was reimbursed. Good job I checked my statement! I would encourage you to do so each month.

Credit card over limit disaster

Unfortunately, the credit card company was not willing to reimburse my money. As it turned out, I had gone the other way, spent and paid off too much on my card. I had exceeded my credit limit. It didn't matter that I was able to pay off the card in full, nor that it was the credit card company's own system that allowed me to exceed my limit. The charge was for exceeding my limit and as was explained to me, there would be no wavering of my charge.

Ironically, had I been a less cautious borrower, accruing debt and paying interest, the credit card company explained that they may have wavered the charges on a late interest payment. However, since I was the type of customer that would never be in that situation, the Company looks to make whatever money it can, as such, no charges could be wavered.

The lesson that I have learnt from this is twofold:

1) I need to pay closer attention to the amount that I am spending on my credit card. I need to try to stay well within my credit limit. In fact to build my credit score, it is suggested that I keep within a third of my credit limit on each card.
2) I really should have made sure that I knew all of the potential charges on the card. I was naive in my thinking that the credit card company simply wouldn't allow me to overspend on my credit card

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Is it ethical to strive for riches?

Money and Ethics

"Money is the route of all evil"

Since the development of the barter economy into the current form based on a medium of exchange, money has been synonymous with evil. It is often perceived as greedy to want money or as selfish to want wealth.

Throughout literature, culture, media and the arts, time and time again, the pursuit of money is depicted as unworthy. Just think of films such as Wall Street or even in Shakespeare's Merchant of Venice. The main protagonist of both being portrayed as unlikeable due to their lust for riches.

Is money the route of all evil?

Whilst I do not deny that money can be used to do bad things or is a motivation for wrongdoing, I must emphasise that it all depends on the agent who pursues such a goal. The money in itself isn't bad,  nor the pursuit of it. What is bad is the means by which people pursue. For example, if people perform criminal acts in the pursuit of wealth then clearly that is wrong. However, if someone wants to work hard, save and invest to produce his wealth, then how can this be wrong?

Some may argue that to only want things for yourself is selfish. I do not doubt that there are those saints of society who only wish things for other people. I and the vast majority of people I know are not motivated by the pure love of doing things for others. We need to know that there is a gain for ourselves in every act. I see nothing wrong with this. It is this motivation that has created incredible things. Did the Pharoes create the Pyramids out if their love for others? Did the Beatles make great music purely out of the selfless need to provide other people with lyrics they would enjoy listening to? In both cases it is not selflessness that motivates them, it is selfishness. Notice that that doesn't mean that others haven't benefited. We get to enjoy looking at the Pyramids whilst listening to Beatles albums today. It is not wrong to want to be selfish. In fact it can produce great things.

As you can see, in doing the things that you enjoy, and in pursuing the goals that you wish to achieve, it is possible that others will benefit. The capitalist economy did not form because people are benevolent in wishing to provide goods and services to one another. It is because they selfishly want to provide a living for themselves that drives them to produce the things that others are willing to pay for.

So what's my justification for wanting to become a multimillionaire?

The act of building wealth is twofold:

1) Reaching Life Goals

There are certain things that I want to do in my life. I want to design my own house to live and retire in. I want to be able to spend time with my family, friends, children and grandchildren. I want to have the time and be able to travel the world. I want to start my own business. I want to help people both financially and through guidance and teaching.

None of these goals  come for free (for setting goals read this article). Even creating the availability of time requires money (because if you can only spend what you earn from work then time spent doing other things is costly - this is why I don't want my future activities to rely on employment income, but on alternative incomes). The house alone will probably cost close to £5 million in today's money. 

2) Game of Life

In the Game of Life there is no one to tell you how you are doing. What we get out of life comes from what we put into it. Unfortunately, (and this ties in with point 1) we have no one there to tell us whether we could be doing better. Money serves a good substitute if treated as a scorecard for life. The more wealth that I've build up, the better I'm doing. Of course it isn't a perfect method of scoring. There are plenty of achievements in life that one cannot place a monetary value such as family, friends and experiences (although arguably more experiences of a better quality are obtainable with greater wealth and disposable income). Nonetheless, money serves as the best alternative to scoring in life.

I would point out that I do not believe that this means that richer people are more successful in life than poorer people. What I mean is that the measure of success should be relative to what you could be, rather than how you compare to others.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.


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